Saturday, April 25, 2009

Cognitive Dissonance and Groupthink

No sooner do I rail against the avoidance of cognitive dissonance theory by behavioral economists than a major paper employing CD in new and powerful ways appears: "Groupthink: Collective Delusions in Organizations and Markets" by Roland Benabou. This paper places CD in a social context, where a club good is being produced, and individual effort depends on estimations of the future, but there is also utility or disutility from the state of expectation (influenced by information). Individuals “choose” to accept or reject new information (or combine the two in mixed strategy form), as in most formalizations of CD. The result is a social process that exhibits less or more CD at the individual level. Here is the abstract:

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 hierarchical 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.

3 comments: said...


This matter of people in groups being forced or pressured to go along with delusions by higher ups I think had a lot to do with the recent finanicial crises. So, we keep hearing about all these people in finanncial institutions who "knew better" about what was going on and what they were doing. But, as long as somebody down the hall was making lots of money doing it, higher ups would think it was great, and did not want to hear the whinings of doubters, who learned to keep their doubts to themselves and go along to get along.

Shag from Brookline said...

This brings to mind the Pied Piper and perhaps accounts for lemmings.

Back in the late 1960s, I invested in a coffee plantation in Costa Rica that had attracted corporate executives from Canada as well as MA; it was a tax shelter before tax shelters became popular. I read the literature and was intrigued as to how it would all turn out, as it would take five (5) years for the coffee trees to mature and produce coffee beans. Much of the investment could be written off as farming expense for US federal tax purposes when marginal rates were quite high. I really did not have confidence in the investment but went along for the ride. Periodic reports would issue from the developer and in the second or third year, a report identified a little red bug that was discovered on the trees that appeared to be controllable. But it turned out, over the following years, that the little red bug devastated the trees, bankrupting the plantation. My losses were not significant and Uncle Sam subsidized a significant portion. That was my only farming investment as I discovered that my green thumb would better develop from counting greenbacks rather than investments in far off exotic lands. (Back in those days, Costa Rica was like the Switzerland of Central America.)

Brutus said...

With rational expections based models trapped in a cul-de-sac, and Akerlof and Shiller pushing their "animal spirits", may I humbly propose the next great paradigm shift for economic theory:
"Delusional Expectations".