Here’s a little piece I wrote for a project as part of my MBA. It’s on the concept of groupthink, whereby bad decisions are made by a group in order to avoid conflict and maintain group cohesion. The concept was described by Irving Janis in 1971*. Janis originally wrote about Groupthink in relation to The Bay of Pigs invasion, Vietnam, and the bombing of Pearl Harbour. My two-cents is on the current financial crisis. How’s that for an ambitious first blog post? For my next post I’ll put up something about how to avoid groupthink. I’m kinda obsessed with groupthink at the moment, me being a member of a cult ‘n all.
In the interests of altermodernism, any further additions to the list or corrections would be greatly appreciated, ideally before next Monday when I have my exam! (I’m supposed to be studying not blogging)
Groupthink: The Global Financial crisis
The current financial crisis is a clear example of the dangers of groupthink. The crisis is the result of the bursting of asset bubbles across the world, be they property, bank loans, stocks etc. Asset bubbles are not new. How they occur is not known exactly, but their effect on an economy can be detrimental as we can now see.
Who was “the group”? At the moment the “greedy” bankers are in the spotlight. Throw in the politicians, economists, builders and businesses and while you’re at it anyone who bought a house, invested in equities, or even put their money in a pension with the belief that prices will always rise and they will continue to make money on them.
But surely someone should have stopped all of this? Well some did shout but groupthink got in the way of sensible thinking. Here’s how:
Illusions of invulnerability
The financial markets believed they were in a new paradigm of economics where the business cycle was managed once and for all. Complex financial instruments such as securitisations or collateralised debt obligations meant risk was moved off. This led to more risks been taken.
Ignoring warnings/collective rationalisation
During the time the bubble was inflating (2002 – 2007) many economists across the world warned of a serious asset bubble but their warnings were ignored. Nouriel Roubini, an economist, warned the IMF of the bubble in 2006 but people thought he was delusional.
Illusion of morality
The smartest and brightest economists and bankers were convinced their “rational” economic decisions were for the best and could not see the ethical consequences.
Robert Shiller, an economist who was also on the board of the New York Federal reserve bank explains how he felt he would be ostracized, would not be taken seriously or would have his professional stature questioned if he deviated from the consensus opinion of the rest of the board. Other economists knew what was happening but they would not talk about it professionally. (Shiller has a great article about this and because this is not an academic blog I don’t have to reference it..nice)
Illusion of unanimity
Because people didn’t talk about the problem collectively they all believed there was no problem
Did any one individual protect the group from adverse information? Well, anyone with an interest in keeping the bubble growing which is almost everyone.
Why did groupthink occur?
Most people involved in finance or economics come from similar backgrounds, wherever they are in the world, and they certainly have similar ideologies. The mainstream media, from which there should have been greater insight or criticism, were almost complicit in the illusion.
*I can’t be bothered doing any of that tagging/linking lark. Find stuff yourself