Groupthink: Collective Delusions in Organizations and Markets

Abstract

I model collective denial and information avoidance in groups and organizations. When wishful thinking by others is beneficial to an agent, this makes him more willing to face reality; when it is harmful this pushes him toward denial, which becomes contagious. This simple and general mechanism leads to multiple social cognitions of reality, independently of payoff complementarities or private signals. In hierarchies, realism and denial will trickle down from the leaders. Contagious exuberance can also seize asset markets, generating investment frenzies and crashes. The welfare analysis differentiates group morale from groupthink and identifies a fundamental tension in organizations' attitudes toward dissent.