IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper

Groupthink: Collective Delusions in Organizations and Markets

  • Bénabou, Roland

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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=7193
Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7193.

as
in new window

Length:
Date of creation: Mar 2009
Date of revision:
Handle: RePEc:cpr:ceprdp:7193
Contact details of provider: Postal:
Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.

Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820

Order Information: Email:


References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Caplin, A. & Leahy, J., 1992. "Business as Usual, Market Crashes, and Wisdom after the Fact," Harvard Institute of Economic Research Working Papers 1594, Harvard - Institute of Economic Research.
  2. William N. Goetzmann & Nadav Peles, 1997. "Cognitive Dissonance And Mutual Fund Investors," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 20(2), pages 145-158, 06.
  3. Xavier Gabaix & Arvind Krishnamurthy & Olivier Vigneron, 2005. "Limits of Arbitrage: Theory and Evidence from the Mortgage-Backed Securities Market," NBER Working Papers 11851, National Bureau of Economic Research, Inc.
  4. Drew Fudenberg & David K. Levine, 1998. "The Theory of Learning in Games," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061945.
  5. Andrea Prat, 2002. "The wrong kind of transparency," LSE Research Online Documents on Economics 3679, London School of Economics and Political Science, LSE Library.
  6. Eric Van den Steen, 2010. "On the origin of shared beliefs (and corporate culture)," RAND Journal of Economics, RAND Corporation, vol. 41(4), pages 617-648.
  7. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates
    [This Time Is Different: Eight Centuries of Financial Folly]
    ," Introductory Chapters, Princeton University Press.
  8. Rafael Di Tella & Sebastian Galiant & Ernesto Schargrodsky, 2007. "The Formation of Beliefs: Evidence from the Allocation of Land Titles to Squatters," The Quarterly Journal of Economics, Oxford University Press, vol. 122(1), pages 209-241.
  9. Weizsäcker, Georg, 2008. "Do We Follow Others When We Should? A Simple Test of Rational Expectations," IZA Discussion Papers 3616, Institute for the Study of Labor (IZA).
  10. Bénabou, Roland & Tirole, Jean, 2002. "Willpower and Personal Rules," CEPR Discussion Papers 3143, C.E.P.R. Discussion Papers.
  11. Van den Steen, Eric, 2003. "Organizational Beliefs and Managerial Vision," Working papers 4224-01, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  12. Jacob Goeree & Thomas Palfrey & Brian Rogers, 2004. "Self-Correcting Information Cascades," Levine's Bibliography 122247000000000153, UCLA Department of Economics.
  13. Gale, D. & Chamley, C., 1992. "Information Revelation and Strategic Delay in a Model of Investment," Papers 10, Boston University - Department of Economics.
  14. Jose A. Scheinkman & Wei Xiong, 2003. "Overconfidence and Speculative Bubbles," Journal of Political Economy, University of Chicago Press, vol. 111(6), pages 1183-1219, December.
  15. Roberta Dessí, 2008. "Collective Memory, Cultural Transmission, and Investments," American Economic Review, American Economic Association, vol. 98(1), pages 534-60, March.
  16. Benabou, Roland & Tirole, Jean, 2005. "Incentives and Prosocial Behavior," IZA Discussion Papers 1695, Institute for the Study of Labor (IZA).
  17. Battaglini, Marco & Benabou, Roland & Tirole, Jean, 2005. "Self-control in peer groups," Journal of Economic Theory, Elsevier, vol. 123(2), pages 105-134, August.
  18. Loewenstein, George, 1987. "Anticipation and the Valuation of Delayed Consumption," Economic Journal, Royal Economic Society, vol. 97(387), pages 666-84, September.
  19. Andrew Caplin & John Leahy, 2001. "Psychological Expected Utility Theory and Anticipatory Feelings," The Quarterly Journal of Economics, Oxford University Press, vol. 116(1), pages 55-79.
  20. Hanming Fang & Giuseppe Moscarini, 2003. "Morale Hazard," Cowles Foundation Discussion Papers 1422, Cowles Foundation for Research in Economics, Yale University.
  21. Markus K. Brunnermeier & Christian Gollier & Jonathan A. Parker, 2007. "Optimal Beliefs, Asset Prices, and the Preference for Skewed Returns," NBER Working Papers 12940, National Bureau of Economic Research, Inc.
  22. Roland Bénabou & Jean Tirole, 2003. "Intrinsic and Extrinsic Motivation," Review of Economic Studies, Oxford University Press, vol. 70(3), pages 489-520.
  23. Olivier Compte & Andrew Postlewaite, 2004. "Confidence-Enhanced Performance," American Economic Review, American Economic Association, vol. 94(5), pages 1536-1557, December.
  24. Eliaz, Kfir & Spiegler, Ran, 2006. "Can anticipatory feelings explain anomalous choices of information sources?," Games and Economic Behavior, Elsevier, vol. 56(1), pages 87-104, July.
  25. Juan D. Carrillo & Thomas Mariotti, 2000. "Strategic Ignorance as a Self-Disciplining Device," Review of Economic Studies, Oxford University Press, vol. 67(3), pages 529-544.
  26. Augustin Landier & David Sraer & David Thesmar, 2009. "Optimal Dissent in Organizations," Review of Economic Studies, Oxford University Press, vol. 76(2), pages 761-794.
  27. Ing-Haw Cheng & Sahil Raina & Wei Xiong, 2013. "Wall Street and the Housing Bubble," NBER Working Papers 18904, National Bureau of Economic Research, Inc.
  28. Benjamin E. Hermalin, 1997. "Toward an Economic Theory of Leadership: Leading by Example," Microeconomics 9612002, EconWPA.
  29. Roland Bénabou & Jean Tirole, 2011. "Identity, Morals, and Taboos: Beliefs as Assets," The Quarterly Journal of Economics, Oxford University Press, vol. 126(2), pages 805-855.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:7193. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.