Most of us like to think of ourselves as rugged individualists – people who don’t run with the herd. The reality is less romantic: As countless bubbles have shown – from Dutch tulip mania in the 17th century to inflated property prices in the past decade – the prospect of a quick buck means there’s usually no shortage of people happy to get swept along.
The financial crisis illustrated the risks of such herd behaviour. But it also cast a light on another sort of dangerous collective thinking – groupthink. Unlike herd behaviour – where people, businesses or institutions follow each other blindly – groupthink happens within institutions. In effect, because of real or imagined pressure, employees swallow their doubts and allow their thinking to fall into line with the dominant view. In recent months, several reports have exposed how groupthink allowed regulators and officials to ignore alarm bells in the run up to the crisis.
And it didn’t just happen at national level – even the IMF has admitted that its internal culture tended to silence dissent. In a commendably frank report, the IMF’s evaluation office says one reason why the organisation failed to identify the mounting risks to the global economy was “a high degree of groupthink” and “an institutional culture that discourages contrarian views”.
“The prevailing view among IMF staff – a cohesive group of macroeconomists – was that market discipline and self-regulation would be sufficient to stave off serious problems in financial institutions,” the report says. “They also believed that crises were unlikely to happen in advanced economies, where ‘sophisticated’ financial markets could thrive safely with minimal regulation of a large and growing portion of the financial system.”
Although the term itself isn’t used, groupthink also raises its head in the report from the Financial Crisis Inquiry Commission, which investigated the crisis in the United States. It says that too often, regulators “lacked the political will – in a political and ideological environment that constrained it – as well as the fortitude to critically challenge the institutions and the entire system they were entrusted to oversee.”
The report also shows how the pressure to confirm wasn’t just imagined. At the ratings agency Moody’s, company president Brian Clarkson ruled with an iron fist: “According to some former Moody’s employees, Clarkson’s management style left little room for discussion or dissent. [Gary Witt, a former Moody’s employee] referred to Clarkson as the ‘dictator’ of Moody’s and said that if he asked an employee to do something, ‘either you comply with his request or you start looking for another job.’” The report, by the way, is a terrific read.
And groupthink is one of the factors – along with herd behaviour – fingered in a report on Ireland’s crisis by the Finnish banking expert, Peter Nyberg. In banks and financial institutions, it says, “diverging views or initiatives were often not appreciated and only occasionally sanctioned.” Among the regulators, it says of the Central Bank, for example, that there “are signs that, reinforced by the relatively hierarchical structure of the [Bank], a climate of self-censorship had become prevalent”.
Of course, groupthink alone didn’t cause the crisis. Still, it would be foolish not to think about it can be addressed. The reports offer some thoughts on how that can be done: Among a series of recommendations, the IMF report says staff should be encouraged “to be more candid about the ‘known unknowns,’ to be more ready to challenge their own preconceptions” and that managers “should encourage staff to ask probing questions …”. The Nyberg report says “it must become respectable and welcome to express professionally argued contrarian views…”.
Right now, when regulators and banks are still feeling spooked in the wake of the crisis, there’s probably an appetite for contrarian views. But that may not last forever. The real test of whether dissent is really welcome will come in the next boom, or, more likely, the next bubble.