Groupthink: Collective delusions in organizations and markets

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135 Scopus citations

Abstract

This article 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 (informationavoidance) 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 towards dissent. Contagious exuberance can also seize asset markets, generating investment frenzies and crashes.

Original languageEnglish (US)
Pages (from-to)429-462
Number of pages34
JournalReview of Economic Studies
Volume80
Issue number2
DOIs
StatePublished - Apr 2013

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

Keywords

  • Anticipatory feelings
  • Cognitive dissonance
  • Financial crisis
  • Groupthink
  • Manias
  • Market crashes
  • Market exuberance
  • Morale
  • Organizational Culture
  • Overconfidence
  • Psychology
  • Speculative bubbles
  • Toxic assets
  • Wishful thinking

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