Groupthink: Collective Delusions in Organizations and Markets

This paper 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 (information avoidance) 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 toward dissent. Contagious exuberance can also seize asset markets, generating investment frenzies and crashes. ∗Princeton University, NBER, CEPR, CIFAR, IZA and IAST. I am grateful for valuable comments to Daron Acemoglu, George Akerlof, Bruno Biais, Alan Blinder, Patrick Bolton, Philip Bond, Markus Brunnermeier, Andrew Caplin, Sylain Chassang, Rafael Di Tella, Xavier Gabaix, Bob Gibbons, Boyan Jovanovic, Alessandro Lizzeri, Glenn Loury, Kiminori Matsuyama, Wolfgang Pesendorfer, Ben Polak, Eric Rasmussen, Ricardo Reis, Jean-Charles Rochet, Tom Romer, Julio Rotemberg, Tom Sargent, Hyun Shin, David Sraer, Jean Tirole, Glen Weyl, Muhamet Yildiz and participants at many seminars and conferences. I also benefited from valuable suggestions by four anonymous referees and the editor, Marco Ottaviani. Rainer Schwabe, Andrei Rachkov and Edoardo Grillo provided superb research assistance. Support from the Canadian Institute for Advanced Research and the Institute for Advanced Study in Toulouse are gratefully acknowledged.