Those institutions who sold subprime credit protection, or otherwise established long positions in subprime credit and home price performance (or, left existing housing exposures unhedged near the market peak) succumbed to prevailing conventional wisdom. They really thought - or, really wanted to believe - that the combination of historically low mortgage rates and robust population growth would prevent a crash in home prices (which, as even Alan Greenspan knew then, could never occur simultaneously in major real estate markets across the nation), and that triple-A “opinions” of collections of correlated, triple-B securities backed by shitty2 loans were based upon thorough, objective analysis, and were, thus, well-informed (and reliable) predictors of future investment performance.
Such “groupthink”, along with competitive and political urges, created momentum for the ill-fated, “long & wrong” positions. The power of these combined forces on the market was awesome – so powerful that for many people, the forces overwhelmed the motivation to acknowledge (let alone attempt to manage) a mountain of housing risk. It was there for all to see: homeowners, lenders, real estate and loan brokers, rating agencies, politicians, regulators, insurers, guarantors, Wall Street dealers, and investors. In hindsight, it seems as though the shorts were the only parties with their eyes open and really thinking.
Symptoms of Groupthink
Illusion of Invulnerability: Members ignore obvious danger, take extreme risk, and are overly optimistic.
Collective Rationalization: Members discredit and explain away warning contrary to group thinking.
Illusion of Morality: Members believe their decisions are morally correct, ignoring the ethical consequences of their decisions.
Excessive Stereotyping:The group constructs negative stereotypes of rivals outside the group.
Pressure for Conformity: Members pressure any in the group who express arguments against the group's stereotypes, illusions, or commitments, viewing such opposition as disloyalty.
Self-Censorship: Members withhold their dissenting views and counter-arguments.
Illusion of Unanimity: Members perceive falsely that everyone agrees with the group's decision; silence is seen as consent.
Mindguards: Some members appoint themselves to the role of protecting the group from adverse information that might threaten group complacency.
Source: Janis, I. L. & Mann, L. (1977). Decision making: A psychological analysis of conflict, choice, and commitment. New York: Free Press
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2Senator Carl Levin, Chairman of the Senate Permanent Subcommittee on Investigations.
