Explain what the term groupthink means.Describe at least three (3) of the characteristics that groups that practice groupthink have.Why is it said that when groupthink dominates group deliberations, the likelihood of poor decision making increases? Role of groupthink in the financial crisisWhen members and leaders of an organization are captured by their beliefs, they only see whatthey want to see. When this shortcoming is combined with ambition and greed, a feedback loopdevelops that prevents information from being correctly interpreted and distorts reality. Groupmembers may rationalize or ignore warning signs that oppose their beliefs and develop illusionsof invulnerability. Aspects of these processes are seen by many historians as the basicexplanation for the excessive credit expansion that in 2007 fueled the subprime mortgage crisisand subsequent financial crisis. In the years leading up to the crisis, clear warnings that serioustrouble was imminent were ignored. The respected chairman of the US Federal Reserve, AlanGreenspan, was a strong advocate of free markets and supported minimal intervention. He wasalso known to be unreceptive to ideas that challenged his own. As William White, economist andhead of the Bank for International Settlements, recalls: "Greenspan always demanded respect."And who could question Greenspan? He was a financial superstar, and everything was goingwell. As White later stated: "When you're inside the bubble, everybody feels good, and nobodywants to believe that it can burst." White was the only central banker in the world willing tochallenge or criticize Greenspan and his ideas. He predicted the proximity of the financial crisisyears before it occurred and presented a document to the central banks that contradicted all ofGreenspan's ideas. Despite White and his team's persistent criticism of mortgage securitization,explanations of the dangers of subprime lending and presentation of evidence about the lack ofcredibility of rating agencies, few people listened. in the top-secret world of central banking. InWhite's words: "In some ways, everyone expected that it wouldn't go down, as long as you didn'tlook at the downsides." Central bankers knew all the ingredients of the financial crisis two yearsbefore it broke. Even the Mortgage Insurance Companies of America, an association of mortgageproviders in the United States, sent a letter to Alan Greenspan expressing deep concern aboutsubprime mortgage lending practices, but also including suspicion that the Fed could be usingincorrect data. However, the data and warnings were ignored because the economy was doingwell and billions of dollars in bonds were being placed on Wall Street every day. No one waseager to end the party. When Ben Bernanke took over for Greenspan in early 2006, he, too,ignored the warnings. Even when the financial crisis began, Bernanke downplayed the risk of theproblems, which caused them to spread further. We now know that the problems and concernsraised by White and others have shaken the foundations of the world economy. To reduce thechances that groupthink will undermine the financial sector again, some experts have suggestedthat diversity should be increased in senior management and among those who develop productsthat put the financial system at risk. People who are similar (in age, race, education, gender, etc.)tend to think the same way, and those with different backgrounds may be more willing tochallenge ideas and counter the effects of groupthink.

Groupthink is a phenomena where people tend to agree with the group's consensus rather than…

Explain what the term groupthink means. Describe at least three (3) of the characteristics that groups that practice groupthink have. Why is it said that when groupthink dominates group deliberations, the likelihood of poor decision making increases?

Explain what the term groupthink means. Describe at least three (3) of the characteristics that groups that practice groupthink have. Why is it said that when groupthink dominates group deliberations, the likelihood of poor decision making increases?

Understanding Business

12th Edition

ISBN:9781259929434

Author:William Nickels

Publisher:William Nickels

Chapter1: Taking Risks And Making Profits Within The Dynamic Business Environment

Section: Chapter Questions

Problem 1CE

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