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How are the elements of group-think exemplified in the financial crisis? 2. What could be done to reduce the effects of groupthink in the future? 3. Do you think that increasing diversity in leadership positions in financial companies would reduce groupthink? Because?

How are the elements of group-think exemplified in the financial crisis? 2. What could be done to reduce the effects of groupthink in the future? 3. Do you think that increasing diversity in leadership positions in financial companies would reduce groupthink? Because?

Foundations of Business (MindTap Course List)
Foundations of Business (MindTap Course List)
6th Edition
ISBN:9781337386920
Author:William M. Pride, Robert J. Hughes, Jack R. Kapoor
Publisher:William M. Pride, Robert J. Hughes, Jack R. Kapoor
Chapter16: Mastering Financial Management
Section: Chapter Questions
Problem 1DQ
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How are the elements of group-think exemplified in the financial crisis?
2. What could be done to reduce the effects of groupthink in the future?
3. Do you think that increasing diversity in leadership positions in financial companies would reduce groupthink? Because?

Role of groupthink in the financial crisis When members and leaders of an organization are captured by their beliefs, they only see what they want to see. When this shortcoming is combined with ambition and greed, a feedback loop develops that prevents information from being correctly interpreted and distorts reality. Group members may rationalize or ignore warning signs that oppose their beliefs and develop illusions of invulnerability. Aspects of these processes are seen by many historians as the basic explanation for the excessive credit expansion that in 2007 fueled the subprime mortgage crisis and subsequent financial crisis. In the years leading up to the crisis, clear warnings that serious trouble was imminent were ignored. The respected chairman of the US Federal Reserve, Alan Greenspan, was a strong advocate of free markets and supported minimal intervention. He was also known to be unreceptive to ideas that challenged his own. As William White, economist and head of the Bank for International Settlements, recalls: "Greenspan always demanded respect." And who could question Greenspan? He was a financial superstar, and everything was going well. As White later stated: "When you're inside the bubble, everybody feels good, and nobody wants to believe that it can burst." White was the only central banker in the world willing to challenge or criticize Greenspan and his ideas. He predicted the proximity of the financial crisis years before it occurred and presented a document to the central banks that contradicted all of Greenspan'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 of credibility of rating agencies, few people listened. in the top-secret world of central banking. In White's words: "In some ways, everyone expected that it wouldn't go down, as long as you didn't look at the downsides." Central bankers knew all the ingredients of the financial crisis two years before it broke. Even the Mortgage Insurance Companies of America, an association of mortgage providers in the United States, sent a letter to Alan Greenspan expressing deep concern about subprime mortgage lending practices, but also including suspicion that the Fed could be using incorrect data. However, the data and warnings were ignored because the economy was doing well and billions of dollars in bonds were being placed on Wall Street every day. No one was eager 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 the problems, which caused them to spread further. We now know that the problems and concerns raised by White and others have shaken the foundations of the world economy. To reduce the chances that groupthink will undermine the financial sector again, some experts have suggested that diversity should be increased in senior management and among those who develop products that 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 to challenge ideas and counter the effects of groupthink.
Transcribed Image Text:Role of groupthink in the financial crisis When members and leaders of an organization are captured by their beliefs, they only see what they want to see. When this shortcoming is combined with ambition and greed, a feedback loop develops that prevents information from being correctly interpreted and distorts reality. Group members may rationalize or ignore warning signs that oppose their beliefs and develop illusions of invulnerability. Aspects of these processes are seen by many historians as the basic explanation for the excessive credit expansion that in 2007 fueled the subprime mortgage crisis and subsequent financial crisis. In the years leading up to the crisis, clear warnings that serious trouble was imminent were ignored. The respected chairman of the US Federal Reserve, Alan Greenspan, was a strong advocate of free markets and supported minimal intervention. He was also known to be unreceptive to ideas that challenged his own. As William White, economist and head of the Bank for International Settlements, recalls: "Greenspan always demanded respect." And who could question Greenspan? He was a financial superstar, and everything was going well. As White later stated: "When you're inside the bubble, everybody feels good, and nobody wants to believe that it can burst." White was the only central banker in the world willing to challenge or criticize Greenspan and his ideas. He predicted the proximity of the financial crisis years before it occurred and presented a document to the central banks that contradicted all of Greenspan'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 of credibility of rating agencies, few people listened. in the top-secret world of central banking. In White's words: "In some ways, everyone expected that it wouldn't go down, as long as you didn't look at the downsides." Central bankers knew all the ingredients of the financial crisis two years before it broke. Even the Mortgage Insurance Companies of America, an association of mortgage providers in the United States, sent a letter to Alan Greenspan expressing deep concern about subprime mortgage lending practices, but also including suspicion that the Fed could be using incorrect data. However, the data and warnings were ignored because the economy was doing well and billions of dollars in bonds were being placed on Wall Street every day. No one was eager 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 the problems, which caused them to spread further. We now know that the problems and concerns raised by White and others have shaken the foundations of the world economy. To reduce the chances that groupthink will undermine the financial sector again, some experts have suggested that diversity should be increased in senior management and among those who develop products that 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 to challenge ideas and counter the effects of groupthink.
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