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Groupthink: Collective Delusions in Organizations and Markets

  • Benabou, Roland

    ()

    (Princeton University)

This paper investigates collective denial and willful blindness in groups, organizations and markets. Agents with anticipatory preferences, linked through an interaction structure, choose how to interpret and recall public signals about future prospects. Wishful thinking (denial of bad news) is shown to be contagious when it is harmful to others, and self-limiting when it is beneficial. Similarly, with Kreps-Porteus preferences, willful blindness (information avoidance) spreads when it increases the risks borne by others. This general mechanism can generate multiple social cognitions of reality, and in hierarchies it implies that realism and delusion will trickle down from the leaders. The welfare analysis differentiates group morale from groupthink and identifies a fundamental tension in organizations' attitudes toward dissent. Contagious exuberance can also seize asset markets, generating investment frenzies and crashes.

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File URL: http://ftp.iza.org/dp7322.pdf
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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7322.

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Length: 51 pages
Date of creation: Mar 2013
Date of revision:
Publication status: published in: Review of Economic Studies, 2013, 80 (2), 429-462
Handle: RePEc:iza:izadps:dp7322
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  1. 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.
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  3. Ing-Haw Cheng & Sahil Raina & Wei Xiong, 2013. "Wall Street and the Housing Bubble," NBER Working Papers 18904, National Bureau of Economic Research, Inc.
  4. Roland Bénabou & Jean Tirole, 2003. "Intrinsic and Extrinsic Motivation," Review of Economic Studies, Oxford University Press, vol. 70(3), pages 489-520.
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  16. Hanming Fang & Giuseppe Moscarini, 2004. "Morale Hazard," Yale School of Management Working Papers ysm386, Yale School of Management.
  17. Van den Steen, Eric, 2005. "On the Origin of Shared Beliefs (and Corporate Culture)," Working papers 27855, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  18. Gale, D. & Chamley, C., 1992. "Information Revelation and Strategic Delay in a Model of Investment," Papers 10, Boston University - Department of Economics.
  19. Augustin Landier & D. Sraer & David Thesmar, 2009. "Optimal Dissent in Organizations," Post-Print hal-00461108, HAL.
  20. 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.
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  24. 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.
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