Groupthink

Definition of Groupthink:

Groupthink is a term first used by social psychologist Irving Janis in 1972. It describes a situation where group members form opinions and make decisions that are more extreme or more uniform than they would have individually, due to the dynamics of the group.

This happens because members of the group prioritize consensus and cohesion over critical evaluation of alternative viewpoints and solutions.

Is Groupthink Good or Bad?:

Groupthink is generally considered negative, especially in decision-making contexts like trading. It often leads to poor decisions because it suppresses dissenting viewpoints, discourages creative solutions, and overlooks potential risks.

In trading, this can result in herd behaviour, which may lead to inflated asset prices and ultimately significant financial losses when the market corrects itself.

Symptoms of Group Thinking

Psychologist Irving Janis is characterized by eight primary symptoms that can help identify its presence within a group. Each symptom can contribute to poor decision-making and a lack of critical analysis within the group.

1. Illusion of Invulnerability: This creates excessive optimism and encourages taking extreme risks. Group members may develop a sense of overconfidence in their decisions and a belief that nothing can go wrong, often underestimating potential dangers and risks.
2. Collective Rationalization: Members of the group discount warnings and do not reconsider their assumptions. They may rationalize away warning signs and avoid reconsidering their beliefs or decisions, often ignoring any evidence that might challenge the group’s consensus.
3. Belief in the Inherent Morality of the Group: This leads members to ignore the ethical or moral consequences of their decisions. The group believes in the rightness of their cause, which can justify even morally dubious actions.
4. Stereotyped Views of Out-groups: Groups under groupthink often create negative views of those outside the group, especially opponents or rivals. They may see outsiders as too weak, evil, biased, or stupid to make valid arguments, further solidifying internal consensus.
5. Direct Pressure on Dissenters: Members who express arguments against any of the group’s views are pressured to conform. Dissent is discouraged, and loyalty to the group is valued over critical reasoning and evaluation of alternatives.
6. Self-Censorship: Doubts and deviations from the perceived group consensus are not expressed. Members withhold their dissenting views and counterarguments, leading to a false appearance of agreement.
7. Illusion of Unanimity: The lack of dissent is viewed as unanimity. Silence is interpreted as consent, which can lead to a mistaken belief that everyone is fully in agreement with the group’s decisions.
8. Self-Appointed ‘Mindguards’: Some members appoint themselves as protectors against opposing views. These “mindguards” protect the group from dissenting information that might disrupt the consensus, further isolating the group from outside opinions.

Groupthink In Trading Example

A classic example of groupthink in trading can be observed in the dot-com bubble of the late 1990s and early 2000s. During this period, investors collectively overvalued internet-related companies without a critical evaluation of their business models or profitability.
Driven by the fear of missing out (FOMO) and influenced by the overwhelming optimism of their peers, many investors kept pouring money into these companies. This led to a market bubble, which eventually burst, resulting in significant financial losses.

What is Groupthink Similar to?

Groupthink is similar to several other social psychological phenomena, such as:

1. Herd Behavior: Seen in stock markets and social trends, where individuals act collectively without coordinated direction.
2. Conformity: The act of matching attitudes, beliefs, and behaviours to group norms.
3. Mob Mentality: When people are influenced by their peers to adopt certain behaviors on a largely emotional, rather than rational, basis.
4. Echo Chamber Effect: In social media or specific communities where only similar viewpoints are shared and repeated, reinforcing a narrow perspective.

How is Groupthink Damaging?

Groupthink can be particularly damaging due to several factors:

1. Poor Decision-Making: Critical thinking is stifled, leading to decisions that are not based on a thorough evaluation of all available information.
2. Ignorance of Risks: The group may become overly optimistic, ignoring potential risks and warning signs.
3. Suppression of Dissenting Views: Innovative solutions and warnings may be ignored because they conflict with the group’s consensus.
4. Ethical Blindness: Group members might overlook or underestimate the ethical implications of their decisions due to the strong desire for conformity.
5. Increased Vulnerability: By not considering alternative viewpoints or scenarios, the group becomes more vulnerable to external threats or changes in circumstances.
6. Amplification of Errors: Mistakes can be magnified when group consensus leads to rapid, widespread actions, as seen in financial bubbles or panics.

What is the Opposite of Groupthink?

The opposite of groupthink is often considered to be “individualism” or a culture that encourages independent thinking and the expression of dissenting opinions. In such environments, decision-making is characterized by:

1. Critical Evaluation: Each member evaluates ideas and decisions critically, regardless of the group’s consensus.
2. Encouragement of Diverse Opinions: Different viewpoints are not just tolerated but actively encouraged.
3. Independent Thinking: Members are motivated to form their own opinions based on personal analysis rather than going along with the group.
4. Constructive Debate: Contrary viewpoints are discussed openly and constructively, leading to well-rounded decisions.
5. Absence of Pressure to Conform: There’s little to no pressure to align with the majority viewpoint.

In conclusion, while group cohesion and consensus can be beneficial in some circumstances, in critical decision-making processes like trading, the downsides of groupthink usually outweigh the benefits. It’s important for traders and investors to be aware of the influence of groupthink and strive to maintain independent analysis and critical thinking.