Groupthink: Collective Delusions in Organizations and Markets

Roland Benabou

No 7322, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: 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.

Keywords: cognitive biases anticipatory feelings; organizational culture; overconfidence; optimism; morale; market exuberance; manias speculative bubbles; market crashes; financial crises; toxic assets; groupthink; wishful thinking; cognitive dissonance; resolution of uncertainty; psychology (search for similar items in EconPapers)
JEL-codes: D03 D23 D53 D83 D84 E32 G01 G14 Z1 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2013-03
New Economics Papers: this item is included in nep-cbe, nep-cdm, nep-cwa and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (28)

Published - published in: Review of Economic Studies, 2013, 80 (2), 429-462

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https://docs.iza.org/dp7322.pdf (application/pdf)

Related works:
Journal Article: Groupthink: Collective Delusions in Organizations and Markets (2013)
Working Paper: Groupthink: Collective Delusions in Organizations and Markets (2009)
Working Paper: Groupthink: Collective Delusions in Organizations and Markets (2009)
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