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Groupthink: Collective Delusions in Organizations and Markets

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Author Info
Roland Bénabou

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Abstract

I develop a model of (individually rational) collective reality denial in groups, organizations and markets. Whether participants' tendencies toward wishful thinking reinforce or dampen each other is shown to hinge on a simple and novel mechanism. When an agent can expect to benefit from other's delusions, this makes him more of a realist; when he is more likely to suffer losses from them this pushes him toward denial, which becomes contagious. This general "Mutually Assured Delusion" principle can give rise to multiple social cognitions of reality, irrespective of any strategic payoff interactions or private signals. It also implies that in hierachical organizations realism or denial will trickle down, causing subordinates to take their mindsets and beliefs from the leaders. Contagious "exuberance" can also seize asset markets, leading to evidence-resistant investment frenzies and subsequent deep crashes. In addition to collective illusions of control, the model accounts for the mirror case of fatalism and collective resignation. The welfare analysis differentiates valuable group morale from harmful groupthink and identifies a fundamental tension in organizations' attitudes toward free speech and dissent.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14764.

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Date of creation: Mar 2009
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Handle: RePEc:nbr:nberwo:14764

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Find related papers by JEL classification:
D03 - Microeconomics - - General - - - Behavioral Economics; Underlying Principles
D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
G01 - Financial Economics - - General - - - Financial Crises
Z1 - Other Special Topics - - Cultural Economics

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This page was last updated on 2009-11-25.

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