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Groupthink: Collective Delusions in Organizations and Markets

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  • Roland Bénabou

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.

Suggested Citation

  • Roland Bénabou, 2009. "Groupthink: Collective Delusions in Organizations and Markets," NBER Working Papers 14764, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:14764
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    Cited by:

    1. Mauricio Drelichman & Joachim Voth, 2007. "Lending to the borrower from hell: Debt and default in the age of Philip II, 1556-1598," Economics Working Papers 1164, Department of Economics and Business, Universitat Pompeu Fabra, revised Nov 2009.
    2. Jakob de Haan & David-Jan Jansen, 2011. "Corporate culture and behaviour: A survey," DNB Working Papers 334, Netherlands Central Bank, Research Department.
    3. Dovern, Jonas & Fritsche, Ulrich & Loungani, Prakash & Tamirisa, Natalia, 2015. "Information rigidities: Comparing average and individual forecasts for a large international panel," International Journal of Forecasting, Elsevier, vol. 31(1), pages 144-154.
    4. Woodside, Arch G., 2012. "Incompetency training: Theory, practice, and remedies," Journal of Business Research, Elsevier, vol. 65(3), pages 279-293.
    5. Marco LiCalzi & Oktay Surucu, 2012. "The Power of Diversity over Large Solution Spaces," Management Science, INFORMS, vol. 58(7), pages 1408-1421, July.
    6. Muehlenbachs, Lucija & Staubli, Stefan & Cohen, Mark A., 2013. "The Effect of Inspector Group Size and Familiarity on Enforcement and Deterrence," IZA Discussion Papers 7876, Institute for the Study of Labor (IZA).
    7. Brun Irina & Ivanova Alina & Kardanova Elena & Orel Ekaterina, 2016. "Noncognitive Development of First Graders and Their Cognitive Performance," HSE Working papers WP BRP 57/PSY/2016, National Research University Higher School of Economics.
    8. Loungani, Prakash & Stekler, Herman & Tamirisa, Natalia, 2013. "Information rigidity in growth forecasts: Some cross-country evidence," International Journal of Forecasting, Elsevier, vol. 29(4), pages 605-621.
    9. Mauricio Drelichman & Hans‐Joachim Voth, 2011. "Lending to the Borrower from Hell: Debt and Default in the Age of Philip II," Economic Journal, Royal Economic Society, vol. 121(557), pages 1205-1227, December.
    10. Levy, Gilat & Razin, Ronny, 2017. "The coevolution of segregation, polarized beliefs and discrimination: the case of private versus state education," LSE Research Online Documents on Economics 68532, London School of Economics and Political Science, LSE Library.
    11. Le Yaouanq, Yves, 2018. "A Model of Ideological Thinking," Rationality and Competition Discussion Paper Series 85, CRC TRR 190 Rationality and Competition.
    12. Jonas Dovern & Ulrich Fritsche & Prakash Loungani & Natalia T. Tamirisa, 2013. "Information Rigidities in Economic Growth Forecasts; Evidence from a Large International Panel," IMF Working Papers 13/56, International Monetary Fund.
    13. Levy, Gilat & Razin, Ronny, 2015. "Segregation in Education and Labour Market Discrimination: The Role of Peer Beliefs," CEPR Discussion Papers 10394, C.E.P.R. Discussion Papers.
    14. Drelichman, Mauricio & Voth, Hans-Joachim, 2011. "Serial defaults, serial profits: Returns to sovereign lending in Habsburg Spain, 1566-1600," Explorations in Economic History, Elsevier, vol. 48(1), pages 1-19, January.
    15. Michael Kirchler & Caroline Bonn & J�rgen Huber & Michael Razen, 2014. "The �Inflow-Effect� � Trader Inflow and Bubble Formation in Asset Markets," Working Papers 2014-22, Faculty of Economics and Statistics, University of Innsbruck.
    16. Daniel Gros & Sam Langfield & Marco Pagano & Dirk Schoenmaker, 2014. "Allocating macro-prudential powers," Report of the Advisory Scientific Committee 5, European Systemic Risk Board.
    17. Gottlieb, Daniel, 2014. "Imperfect memory and choice under risk," Games and Economic Behavior, Elsevier, vol. 85(C), pages 127-158.

    More about this item

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: 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; Information and Knowledge; Communication; Belief; Unawareness
    • 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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