Groupthink's Role in the 2007 Subprime Mortgage Crisis - Essay Sample

Introduction

Groupthink is a term marked by Irving Janis. The concept is a model used to describe an organization's possible downside, especially to a decision made by a group (Knowles, Phillips & Lidberg, 2017). The idea is widely accepted, even in financial institutions. This essay provides a complete overview of the role that groupthink played in the 2007 mortgage subprime and economic crisis. The case study helps in analyzing the groupthink model and identifying the characters that it played in contributing to the financial crisis of 2007.

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Identify the Most Important Facts Surrounding the Case

Elements of group thinking are one of the most important facts that surround the case. Aspects of group thinking were not only ignored but applied in the wrong ways. The leaders that were involved in the financial crisis were like-minded; each of them overlooks the warning and the signs of a looming crisis. Greenspan ignored the symptoms; the group that he led also assumed that the financial decisions he made were also right. The Mortgage-backed securities had been floated in the market; each of them had raised big chunks of money. Their actions indicated how, as leaders, they were led by greed and lust for money. Apart from Mr. White, not even one person was willing to engage Greenspan.

Mr. White has ignored involving any of them due to the mentality that a lot of people in the group believed that the economy was doing just right. There were those in the group that were ignorant of the mortgage securities with the same reasoning that the economy was doing more than reasonable. Soon after Greenspan left, a like-minded leader took over. Ben Bernake took over and continued being affected by the groupthink model. He continued to downplay the financial risks that were looming. Even as the financial crisis began, not even one was able to question the decision by their leaders. These events led to the financial crisis that followed in the next year.

Identify the Key Issue or Issues

The financial crisis was something that early signs had predicted. Many, including whites, had already seen the possibility of the market going down and the looming financial crisis, but they all downplayed the same. The main concern then arises from identifying the reason why they downplayed the early warnings. Firstly, groupthink, which is the model used, presents the leaders with a lot of social pressure to accept and conform to the known conceptual framework as long as the peer group takes it ( Knowles, Phillips, & Lidberg, 2017). Mr. White had identified the warnings, but it becomes difficult for him to raise observation that would utterly contradict the prevailing wisdom. The common term that no one would have foreseen this is usually a lie, most people might have seen it but are caught up in the groupthink and thereby fear opening up or giving their suggestions openly.

A second key issue surrounding the case is the inability of the officer who has identified the fault to take defensive actions too soon. Suppose the identifying officer takes action too more quickly, and it costs the whole financial organization, he will be blamed. The fear not to take action makes up the second issue in the case study.

Specify Alternative Courses of Action

From the illustrations above, it is clear that the financial organizations were suffering from poor effects of group thinking. In this section of the analysis, the alternative course of action is illustrated. It is also important to acknowledge that in the mentioned case study, group thinking had failed to achieve what it is meant to make. So choices are identified means which would otherwise increase the effectiveness of the group thinking model. The decisions also identify other issues that it would have otherwise worked out then the financial crisis would have otherwise been avoided. The first antidote on the financial crisis would be assembling a diverse team. Immediately the leaders noticed a looming economic crisis; they would convene a different group of about six members. Each team member is given a role to analyze the economic changes that should happen amidst the mortgage security.

A second option is an eyes-open presentation. An open eye presentation is a suggestion by one team member who might have noticed a looming disaster. Senior industry directors should do the eye free presentation from other institutions (Griffin, 2017). These institutions are semi-financial institutions whose leaders are experts that can predict the financial possibilities of both an economy and an institution. The eye-opener presentation is done through a perverse incentive. The final alternative course of action that should be considered is welcoming ideas from the non-senior employees within the financial organizations.

Evaluate Each Course of Action

The three courses of action identified above can evaluate in the following means; Eyes open presentation is a model that works through perverse incentive. A perverse incentive is done by sending faulty market signals to decision-makers within the same financial institutions. If the officer is perceptive enough to recognize the disaster before time, they can take defensive action as soon. Still, they risk being branded greater fool if the process does not materialize. The best means is to present the decision-makers with the facts and let them make a decision. In so doing, decision-makers can make new changes to the mortgage security to avoid financial risks that were already looming within the institution.

Another antidote which includes assembling another team can work. When one groupthink is not working correctly due to lust and greed, it is essential to introduce another group that views from a different perspective. The team might consist of between six to eight members (Clift, 2018). All these members can come together to reach a different outcome. A new group brings new energy and vision. It is also believed to put the original management group on toes. They will be obliged to put aside their lust and greed to solve the financial crisis. When the two groups work together, they are likely to end up getting the mortgage security and business risk right.

Lastly, empowering the less senior employees help the financial organizations. Less senior employees are likely to notice the financial crisis. If they are in a democratic environment, they are likely to give out a suggestion that could be helpful to organizations. If the senior leaders get a decision wrong, they are likely to bring it to their attention so that the risk is avoided.

Recommend the Best Course of Action

The algorithmic trading model that the senior leaders built went wrong with the market trade technique that happened in the 2007 financial crisis. Having put that in perspective, it is essential to learn the kind of action that would have prevented such a financial crisis or better enough to salvage the situation. Of the three courses of work, it is best to reduce the chances of the financial crisis through promoting ideas of every employee. Even those employees of lesser experiences should be engaged in their decision, especially those that have skills in using models. It is through engaging many employees that groupthink stems. Groupthink provides a lot of ideas to the senior leader so that when choosing one of the approaches to use, they have a variety of options to choose from. The range of options makes it easier to get the right model to put up in use.

Conclusion

In conclusion, the case study is a perfect situation where a model has been put to use without putting it to a necessary test. It also serves as an ideal scenario where leadership is autocratic, and the effects have become unmanageable. Diversity in leadership privileged to deal with finances is significant. The first antidote on the financial crisis would be assembling a diverse team.

References

Clift, B. (2018). The IMF and the Politics of Austerity in the Wake of the Global Financial Crisis. Oxford University Press.

Griffin, P. (2017). Financial governance 'after 'crisis: On the liminality of the global financial crisis and its 'afterwards', through a gender lens. Politics, 37(4), 402-417.

Knowles, S., Phillips, G., & Lidberg, J. (2017). Reporting the global financial crisis: A longitudinal tri-nation study of mainstream financial journalism. Journalism Studies, 18(3), 322-340. Bell, S. (2017).