Working Paper: NBER ID: w14764
Authors: Roland Bénabou
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 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.
Keywords: groupthink; collective delusions; organizations; markets; decision-making
JEL Codes: D03; D23; D53; D83; E32; G01
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| individual tendencies towards wishful thinking (D91) | collective delusions (D70) |
| collective delusions (D70) | agents benefit from the delusions of others (L85) |
| agents benefit from the delusions of others (L85) | agents become more realistic in assessments (L85) |
| disconnect from reality harms an agent (D80) | pushes agent towards denial (D82) |
| pushes agent towards denial (D82) | denial spreads contagiously among participants (C92) |
| presence of delusions among peers (C92) | increases likelihood of individual adopting delusional mindset (C92) |
| leadership beliefs (M54) | subordinate behavior (C92) |
| contagious wishful thinking (C92) | market exuberance (G10) |
| market exuberance (G10) | financial instability (F65) |