Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/71631
Authors: 
Bénabou, Roland
Year of Publication: 
2013
Series/Report no.: 
Discussion Paper Series, Forschungsinstitut zur Zukunft der Arbeit 7322
Abstract: 
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.
Subjects: 
groupthink
organizational culture
overconfidence
optimism
morale
market exuberance
manias speculative bubbles
market crashes
financial crises
toxic assets
wishful thinking
cognitive dissonance
cognitive biases anticipatory feelings
resolution of uncertainty
psychology
JEL: 
D03
D23
D53
D83
D84
E32
G01
G14
Z1
Document Type: 
Working Paper

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