Groupthink: Collective Delusions in Organizations and Markets

I develop a model of (individually rational) collective reality denial in groups and organizations, or among participants in a market. More generally, I ask when individual tendencies toward wishful thinking and overoptimism reinforce or dampen each other. To make clear that such groupthink is entirely distinct from standard linkage mechanisms, there are no complementarities or substitutabilities in payoffs in the basic model, nor any private signals that could give rise to social learning or herding. What emerges is thus a new and surprisingly simple mechanism generating interdependencies in information processing, beliefs and actions. Intuitively, whenever an agent benefits (on average) from other' delusions, this tends to make him more of a realist; and whenever their disconnect from reality makes him worse off this pushes him toward denial, which is then contagious. This Mutually Assured Delusion (MAD) principle can, in particular, give rise to multiple equilibria with different "social cognitions" of the same reality. The same general principle implies that, in organizations where some agents have a greater impact on others' welfare than the reverse (e.g., managers and workers respectively), strategies of realism or denial will "trickle down" the hierarchy, so that subordinates will in effect take their beliefs from the leader(s). In addition to collective illusions of control, the model also accounts for the mirror case of collective fatalism and resignation, such as public apathy and "looking away" from humanitarian disasters. In market interactions, equilibrium prices typically introduce a substitutability between agents' decisions that works against collective belief. Nonetheless, I show how, in markets with time-to build features, or more generally where participants find themselves with outstanding positions potentially subject to (endogenous) capital losses, contagious wishful thinking can again take hold, leading to overinvestment and an ultimate crash. Finally, the model's welfare analysis makes clear what factors distinguish valuable group morale from harmful groupthink and generates new results concerning organizations' ex ante and ex post attitudes toward dissenting speech.

For more information, contact Philipp Kircher.