Question

When an organization's leaders and members allow themselves to be captured by their own beliefs, they see only what they want to see. When coupled with ambition and greed, a feedback loop develops that increasingly biases the interpretation of information and distorts reality. Group members may rationalize or ignore warning signs that are in conflict with closely held beliefs and develop illusions of invulnerability. Many historians now feel that aspects of these processes are a core explanation for the excessive credit expansion that fuelled the 2007 subprime mortgage meltdown and subsequent financial crisis.

In the years leading up to the financial crisis, clear warnings of impending problems were ignored. The revered chairman of the U.S. Federal Reserve Bank, Alan Greenspan, was a strong advocate of the free market and supported minimal market intervention. He was also known to be unwelcoming to challenges to his ideas. As William White, the chief economist for the central bank of all central bankers, the Bank for International Settlements, recalls, “Greenspan always demanded respect.” And who could question Greenspan? He was an economic superstar and everything was going well. As White further states, “When you are inside the bubble, everybody feels fine. 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. White predicted the approaching financial crisis years before it happened and presented a paper to the central bankers that contradicted everything Greenspan believed. Despite White's and his team's persistent criticism of the mortgage securitization business, explanations of the perils of risky loans, and provision of evidence about the rating agencies' lack of credibility, few in the highly secretive world of central banking listened. As White later said, “Somehow everybody was hoping that it wouldn't go down as long as you don't look at the downside.”

All the ingredients of the financial crisis were known by the central bankers more than two years before the crisis began. The Mortgage Insurance Companies of America, a trade association of U.S. mortgage providers, even sent a letter to Alan Greenspan expressing its strong concerns about risky mortgage lending practices and speculating that the Fed might be using incorrect data. But the data and warnings were ignored because the economy was doing well and billions in bonuses were being awarded on Wall Street. No one was anxious to break up the party. When Ben Bernanke succeeded Greenspan in early 2006, he also ignored the warnings. Even as the financial crisis began, Bernanke downplayed the risk of the troubles spreading further. We now know that the troubles and concerns highlighted by White and others rocked the foundations of the global economy.

To decrease the chances of groupthink undermining the financial industry again, some experts have suggested increasing the diversity of senior management and among those developing products that affect the risks in the financial system. Because similar people (age, race, education, gender, etc.) tend to think in the same way, perhaps people from different backgrounds would be more willing to question ideas and counter the effects of groupthink.

Questions:

1. How were the elements of groupthink illustrated in the financial crisis?

2. What could be done to reduce the effects of groupthink in the future?

3. Do you think that increasing the diversity of the financial companies' leadership would reduce groupthink? Why or why not?

Answer 1

Answer-

-. Groupthink is said to happen when the individuals from a gathering take choice in request to minimize a contention circumstance and arrive at an agreement in a friendly way.

The case expresses that the there were clear signs and solid warnings accessible to financial arrangement producers, market analysts and national banks before the 2007 subprime contract emergency. Anyway the warnings were overlooked because of groupthink. Alan Greenspan, the executive of U.S. Central Bank emphatically preferred minimum market intervention.

This drove other pioneers in Bank for International Settlements; rule with the expectation of complimentary market despite the fact that there was a reasonable requirement for advertise intervention. This choice was made despite the fact that the pioneers knew that it was anything but an ideal choice.

-. To reduce the effects of groupthink in future, all financial strategy making ought to be straightforwardly attached to current large scale and smaller scale monetary elements. A framework ought to be worked in which high significance is paid to financial information when making choices. Warnings and current improvements ought to never be disregarded. With such a framework set up, ideal choices will be made more often than not.

-. Indeed, I think that increasing the diversity of the financial companies' leadership would reduce groupthink for the basic explanation that it would reduce predispositions.

The more different the leadership the more grounded will be the capacity of the gathering to consider the genuine situations and settle on ideal choices. Diversity will reduce stereotyping in the gathering.

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