Groupthink: Collective Delusions in Organizations and Markets
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.
I am particularly grateful to Jean Tirole, as the paper builds on some of our earlier joint work. I am also thankful for valuable comments to George Akerlof, Daron Acemoglu, Alan Blinder, Markus Brunnermeier, Andrew Caplin, Sylain Chassang, Rafael Di Tella, Xavier Gabaix, Bob Gibbons, Boyan Jovanovic, Alessandro Lizzeri, Glenn Loury, Kiminori Matsuyama, Ben Polak, Eric Rasmussen, Ricardo Reis, Jean-Charles Rochet, Tom Romer, Julio Rotemberg, Tom Sargent, Hyun Shin, Glen Weyl, Muhamet Yildiz and to seminar participants at Princeton, NYU, Cornell, George Mason, INSEAD, Oxford, the Harvard-MIT workshop on the Economics of Organizations, Brown, Yale, Chicago G.S.B., Berkeley, UCSD, UCLA, LSE, PSE, Penn and Duke universities. Rainer Schwabe and Andrei Rachkov provided superb research assistance. Support from the Canadian Institute for Advanced Research is gratefully acknowledged. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Roland BÃ©nabou, 2013. "Groupthink: Collective Delusions in Organizations and Markets," Review of Economic Studies, Oxford University Press, vol. 80(2), pages 429-462. citation courtesy of