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. Roland Bénabou Department of Economics and Woodrow Wilson School Princeton University Princeton, NJ 08544 and NBER rbenabou@princeton.edu “It appears that there are enormous differences of opinion as to the probability of a failure with loss of vehicle and of human life. The estimates range from roughly 1 in 100 to 1 in 100,000. The higher figures come from the working engineers, and the very low figures from management. What are the causes and consequences of this lack of agreement? Since 1 part in 100,000 would imply that one could put a Shuttle up each day for 300 years expecting to lose only one, we could properly ask ‘What is the cause of management’s fantastic faith in the machinery? ’ ” (Richard Feynman, in Rogers Commission Report, 1986) “We have a wealth of information we didn’t have before,” Joe Anderson, then a senior Countrywide executive, said in a 2005 interview. “We understand the data and can price that risk. ” (BusinessWeek, “Not So Smart,” August 2007) This paper examines how collective beliefs and delusions arise and persist in organizations such as teams, firms, bureaucracies and markets. In the aftermath of corporate and public-policy disasters, it often emerges that participants fell prey to a collective form of overconfidence and willful blindness: mounting warning signals were systematically ignored or met with denial, evidence avoided, cast aside or selectively reinterpreted, dissenters discouraged and shunned. Market bubbles and manias exhibit the same pattern of investors acting “color-blind in a sea of red flags”, followed by a crash.1 Janis (1972), analyzing policy decisions such as the Bay of Pigs invasion, the Cuban missile crisis and the escalation of the Vietnam war, identified in those that ended disastrously a cluster of symptoms for which he coined the term “groupthink”. 2 Although some later work was critical of his characterization of those episodes, the concept has flourished and spurred a large literature in social and organizational psychology. Defined in Merriam-Webster’s dictionary as “a pattern of thought characterized by self-deception, forced manufacture of consent, and conformity to group values and ethics”, groupthink was strikingly documented in the official inquiries conducted on the Challenger and Columbia space shuttle disasters. It has also been invoked as a contributing factor in the failures of companies such as Enron and Worldcom, in some decisions relating to the second Iraq war, and most recently in the housing and mortgagerelated financial crisis.3 At the same time, one should keep in mind that the mirror opposite of harmful “groupthink” is precious “group morale” and seek to understand how they differ, even though both involve the maintenance of collective optimism in spite of negative signals. 1 I borrow here the evocative title of Norris’ (2008) account of Merrill Lynch’s mortgage securitization debacle. For detailed accounts of market manias and crashes, see Shiller (2005). The eight symptoms were: (a) illusion of invulnerability; (b) collective rationalization; (c) belief in inherent morality; (d) stereotyped views of out-groups; (e) direct pressure on dissenters; (f) self-censorship; (g) illusion of unanimity; (h) self-appointed mindguards. The model developed here will address (a) to (g). On the space shuttle accidents, see Rogers Commission (1986) and Columbia Accident Investigation Board (2003). On Enron, see Samuelson (2001), Bryce (2002), Cohan (2002), Eichenwald (2005) and Pearlstein (2006). On Iraq, see e.g., Hersh (2004), Suskind (2004) and Isikoff and Corn (2007). On self-deception and self-serving rationalizations as key enablers of corporate misconduct, see Huseman and Driver (1979), Sims (1992), Tenbrunsel and Messick (2004), Anand, Ashforth and Joshi (2005) and Schrand and Zechman (2008).