Does groupthink affect the Monetary Policy Committee?

Some things you just can’t legislate for. Like on February 24, 2022, when Russia launched a full invasion of Ukraine. 

Vladimir Putin had warned the world in several speeches he might do something like this, but it was still a major shock.  

The shock was not only for the poor unfortunate people of Ukraine but for the global economy. The sanctions imposed on Russia produced steep energy prices, while food prices escalated as global supply chains were disrupted, especially as Ukraine was a major exporter of grain and fertilizer. 

Inflation climbed rapidly that year, peaking at 11.1 per cent in the UK, with the Bank of England seemingly caught unprepared for the scale of the disruption. 

With people’s pockets suffering badly the Bank was accused of letting the country down. One of the reasons in the media given for its slow response to the crisis was groupthink, with even former Monetary Policy Committee member David Blanchflower putting the boot in on the interest rate-setting committee’s collective bias. 

Scientists have found there is a strong consensus-seeking tendency among groups when they are asked to make a decision, especially when it is a difficult one, such as taking all the economic information, data, and news from across the world in deciding to raise interest rates or not. 

The Bank of England’s Monetary Policy Committee (MPC) has to do this every six weeks - hence the accusations of groupthink.

As my WBS colleague Nick Chater, Professor of Behavioural Science said: “Whenever groups make decisions, there is the danger that the consensus is one that possibly none of the individual members think is right.” 

Indeed, an often-used experiment at Warwick Business School illustrates just why. Students were asked to value 10 paintings individually and then in groups. The groups consistently valued the paintings higher than almost any of the individuals asked.  

Thus, understanding how groupthink affects the MPC is crucial. It involves examining group dynamics, cognitive biases, and organisational culture. 

This article explores these hidden dynamics and aims to shed light on improving decision-making within the MPC.  

Definition of groupthink 

Groupthink can occur when the need for harmony in a group suppresses dissent, which means it can lead to poor decisions and flawed outcomes. 

Characteristics of groupthink include: 

• A powerful and opinionated leader 
• The group operating under stress 
• Social conformity 
• Fear of being wrong, which is increased if the decisions are made public 
• If there exists a strong consensus view already. 

These traits can contribute to ineffective risk assessment and decision-making.  

The impact of organisational culture on groupthink 

Culture plays a key role in shaping groupthink within the MPC, with leadership style, alongside the values and norms inherent in the Bank crucial.  

Leadership style dictates the openness of discussions, something the governor of the MPC needs to be mindful of. Even the way questions are framed, and other communication patterns influence how ideas circulate within the committee. 

Cultures that have a desire for social conformity can stifle debate, creativity, and critical evaluation. But a culture of open dialogue can foster more robust decisions. 

The dynamics of a group can be very controlling; it can lead to nobody actually making the decision they wanted but feeling they needed to compromise to find a consensus. Sometimes, even if they feel uneasy with a decision, they may go along with it believing the rest of the committee had come to a consensus and so it was appropriate to agree. While a fear of being wrong is also a factor in groupthink emerging. 

Conversely, cultures encouraging diverse opinions foster open dialogue and enhance the decision-making process. MPC decisions may be more robust in such environments. 

Case studies of cultural influence 

An infamous example of groupthink is the failed invasion of Cuba in 1961 by the CIA. The Bay of Pigs invasion to overthrow Fidel Castro fell apart almost as soon as it started, as the 1,500 troops were overwhelmed by Cuba’s better prepared forces and the US pulled air support at the last minute. 

In his 1972 book Victims of Groupthink, US Psychologist Irving Janis argued that President John F. Kennedy’s advisory group, including top officials from the CIA and military leaders, fell into a groupthink trap when planning the failed invasion. 

Janis’ research found the decision-making group dismissed warnings, assumed moral superiority, and stereotyped critics as weak or irrational. The advisory group put direct pressure on any dissenting voices or interpreted silence as agreement, pressured dissenters to conform, and some actively shielded the group from any opposing views.

It became a classic case study of groupthink and allowed the concept to become widely accepted. 

An example from the business world that academics have pored over and found evidence of groupthink is the WorldCom scandal. A major accounting fraud was discovered at the telecommunications firm in 2002, with it found to be illegally inflating its profits by more than $11 billion between 1999 and 2002. 

The discovery led to its collapse and criminal convictions, with US Professor Michael Scharff finding the finance team exhibited high cohesion and an intense desire for unanimity. His analysis found it was driven by CEO Bernie Ebbers’ domineering leadership style, which discouraged dissent and created a culture obsessed with perpetually meeting earning targets. This environment led to the suppression of conflicting views and allowed the sustained, fraudulent accounting decisions to go unchallenged by the small inner circle. 

Cognitive biases in the decision-making process 

While groupthink is a social and psychological phenomenon, it often involves several cognitive biases that reinforce conformity and poor decision-making. Here are some key biases commonly associated with groupthink: 

• Confirmation bias: The tendency to seek out or interpret information that confirms the group’s existing beliefs, while ignoring contradictory evidence
• Overconfidence bias: An inflated belief in the group’s ability to make correct decisions, leading to underestimation of risks.
• Authority bias: Deference to leaders or dominant voices in the group, even when their views are flawed.
• Illusion of unanimity: Silence or lack of opposition is interpreted as agreement, reinforcing the belief that everyone supports the decision. Janis originally discovered this.
• Sunk cost fallacy: Continuing with a flawed decision because the group has already invested time or resources.
• Status quo bias: A preference for maintaining current decisions or beliefs, even when change is warranted.  

These biases skew people’s judgement and colour how they see information.

Recommendations for enhancing decision-making 

There are effective strategies to counteract groupthink. Fostering an environment that values critical evaluation is key, while implementing structured processes or a series of routine questions to go through before making a decision also helps with maintaining objectivity.

Another way around groupthink is for senior teams to have anonymous voting on crucial decisions. Professor Chater says this takes away the social cues and the pressure to agree with the group. 

Dissent should also be encouraged and opposing views incentivised, while making sure the MPC is diverse in terms of backgrounds, cultures and perspectives will help. 

Prioritising these aspects will lead to more balanced and well-informed policy decisions, something the MPC’s reputation relies upon – and indeed the UK economy. 

Further reading:

Why central banks need to understand behavioural finance

How are CEOs influenced by their spouse?

How big should the central bank balance sheet be?

Does the sound of words affect our emotions?

Discover more about behavioural finance on the Global Central Banking and Financial Regulation Qualifications or download a brochure.

Constantinos Antoniou is Associate Professor of Finance and Behavioural Science and teaches Behavioural Finance on the Global Central Banking and Financial Regulation Qualifications and MSc Finance.

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