Have you seen Groupthink in action?

Tim Harford in The FT 

In his acid parliamentary testimony last week, Dominic Cummings, the prime minister’s former chief adviser, blamed a lot of different people and things for the UK’s failure to fight Covid-19 — including “groupthink”. 

Groupthink is unlikely to fight back. It already has a terrible reputation, not helped by its Orwellian ring, and the term is used so often that I begin to fear that we have groupthink about groupthink. 

So let’s step back. Groupthink was made famous in a 1972 book by psychologist Irving Janis. He was fascinated by the Bay of Pigs fiasco in 1961, in which a group of perfectly intelligent people in John F Kennedy’s administration made a series of perfectly ridiculous decisions to support a botched coup in Cuba. How had that happened? How can groups of smart people do such stupid things? 

An illuminating metaphor from Scott Page, author of The Difference, a book about the power of diversity, is that of the cognitive toolbox. A good toolbox is not the same thing as a toolbox full of good tools: two dozen top-quality hammers will not do the job. Instead, what’s needed is variety: a hammer, pliers, a saw, a choice of screwdrivers and more. 

This is obvious enough and, in principle, it should be obvious for decision-making too: a group needs a range of ideas, skills, experience and perspectives. Yet when you put three hammers on a hiring committee, they are likely to hire another hammer. This “homophily” — hanging out with people like ourselves — is the original sin of group decision-making, and there is no mystery as to how it happens. 

But things get worse. One problem, investigated by Cass Sunstein and Reid Hastie in their book Wiser, is that groups intensify existing biases. One study looked at group discussions about then-controversial topics (climate change, same-sex marriage, affirmative action) by groups in left-leaning Boulder, Colorado, and in right-leaning Colorado Springs. 

Each group contained six individuals with a range of views, but after discussing those views with each other, the Boulder groups bunched sharply to the left and the Colorado Springs groups bunched similarly to the right, becoming both more extreme and more uniform within the group. In some cases, the emergent view of the group was more extreme than the prior view of any single member. 

One reason for this is that when surrounded with fellow travellers, people became more confident in their own views. They felt reassured by the support of others. 

Meanwhile, people with contrary views tended to stay silent. Few people enjoy being publicly outnumbered. As a result, a false consensus emerged, with potential dissenters censoring themselves and the rest of the group gaining a misplaced sense of unanimity. 

The Colorado experiments studied polarisation but this is not just a problem of polarisation. Groups tend to seek common ground on any subject from politics to the weather, a fact revealed by “hidden profile” psychology experiments. In such experiments, groups are given a task (for example, to choose the best candidate for a job) and each member of the group is given different pieces of information. 

One might hope that each individual would share everything they knew, but instead what tends to happen is that people focus, redundantly, on what everybody already knows, rather than unearthing facts known to only one individual. The result is a decision-making disaster. 

These “hidden profile” studies point to the heart of the problem: group discussions aren’t just about sharing information and making wise decisions. They are about cohesion — or, at least, finding common ground to chat about. 

Reading Charlan Nemeth’s No! The Power of Disagreement In A World That Wants To Get Along, one theme is that while dissent leads to better, more robust decisions, it also leads to discomfort and even distress. Disagreement is valuable but agreement feels so much more comfortable. 

There is no shortage of solutions to the problem of groupthink, but to list them is to understand why they are often overlooked. The first and simplest is to embrace decision-making processes that require disagreement: appoint a “devil’s advocate” whose job is to be a contrarian, or practise “red-teaming”, with an internal group whose task is to play the role of hostile actors (hackers, invaders or simply critics) and to find vulnerabilities. The evidence suggests that red-teaming works better than having a devil’s advocate, perhaps because dissent needs strength in numbers. 

A more fundamental reform is to ensure that there is a real diversity of skills, experience and perspectives in the room: the screwdrivers and the saws as well as the hammers. This seems to be murderously hard. 

When it comes to social interaction, the aphorism is wrong: opposites do not attract. We unconsciously surround ourselves with like-minded people. 

Indeed, the process is not always unconscious. Boris Johnson’s cabinet could have contained Greg Clark and Jeremy Hunt, the two senior Conservative backbenchers who chair the committees to which Dominic Cummings gave his evidence about groupthink. But it does not. Why? Because they disagree with him too often. 

The right groups, with the right processes, can make excellent decisions. But most of us don’t join groups to make better decisions. We join them because we want to belong. Groupthink persists because groupthink feels good.

Why executives should always listen to unreasonable activists

Andrew Edgecliffe-Johnson in The FT

When Christabel Pankhurst argued the case for women’s suffrage to members of the London Stock Exchange in 1909, the Financial Times reported that her address excited “a few remonstrative ‘Oh, ohs!’ [but] was punctuated throughout by genuine applause, as well as a good deal of merriment at her humorous sallies”. 

After three years of failing to convert such applause into voting rights, however, the movement led by Pankhurst and her mother Emmeline adopted less amusing tactics, and the business pages’ view of it darkened. Arson attacks on post boxes in the City of London in 1912 left the FT fulminating about the need for “drastic measures . . . to protect the community as a whole from the mischievous intentions of a small and insubordinate section”. 

Why dredge this history up now? Because today’s business leaders are being confronted by a new generation of agitators whose aims they consider unrealistic, whose methods they consider unreasonable but whose message will probably prove worth heeding in the long run.  

This year’s annual meeting season has seen protests over executive pay at companies from AstraZeneca to GE. Nuns have harangued Amazon over its facial recognition technology and taken on Boeing over its lobbying. Diversity advocates have castigated boards for moving too slowly to achieve racial and — a century after the suffragettes — gender equality.  

No subject has attracted more militancy of late, however, than companies’ contributions to climate change. And no clash has defined this shareholder spring more clearly than the revolt at ExxonMobil, in which Engine No 1, an activist investor with a minute stake and an aversion to fossil fuels, fought its way on to the $250bn oil major’s board.  

“This is like the shot heard around the world,” says Robert Eccles, a Saïd Business School professor. Other companies and investors are realising that “if this little hedge fund can do this to ExxonMobil then, oh, things are different”.  

Shareholders’ views of Big Oil were already shifting faster than Exxon had changed its business model, Eccles notes, but like Pankhurst’s troublemakers: “You needed the spark: they blew up the mailbox.”  

Before Engine No 1, there was the civil disobedience of Extinction Rebellion, which has dumped fake coal outside Lloyd’s of London and blockaded News Corp printing sites in the past year. Environmental campaigners had targeted the offices of JPMorgan Chase in New York and BlackRock in Paris. And Greta Thunberg had shown up at the World Economic Forum last year and rubbished Davos-goers’ tree-planting incrementalism.  

Such zealous tactics seem guaranteed to generate more irritation than applause. As Eccles puts it, “here are people who . . . don’t hold any of the cards. Unless you’re breaking the rules or using the rules really aggressively, as Engine No 1 did, you can’t get attention.” 

That makes them easy to dismiss. People on both extremes of the fossil fuels debate “are a little nuts”, Warren Buffett told Berkshire Hathaway’s annual meeting last month.  

Maybe, but from street style to fashions on Wall Street, new ideas tend to start on the fringes. The examples of the Pankhursts and successive campaigners for causes ranging from civil rights to gay rights suggest that the most powerful ideas become mainstream in the end.  

That rarely happens overnight: it took until 1928 for British women to gain electoral equality with men. But today’s irritants can serve as harbingers of tomorrow’s consensus.  

That should make them valuable to any company wanting to understand the risks and opportunities in the years ahead. Every CEO knows that society’s expectations of business are constantly changing, but few have worked out that their harshest critics might help them position themselves for those shifts. 

Society’s expectations still matter most to boards when expressed through their shareholders’ votes, and the continued growth of socially conscious investing suggests that the agendas of provocateurs and portfolio managers are converging.  

This week, for example, a UBS survey of rich investors found 90 per cent of them claimed that the pandemic had made them more determined to align their investments with their values.  

That report again underscored how younger capitalists are driving this process: almost 80 per cent of investors under 50 said Covid-19 had made them want to make a bigger difference in the world, compared with just half of the over-50s. It is worth executives asking themselves which of those demographics they are spending more time with.  

Exxon’s unreasonable activists showed it that the world had changed and it had not. The question for other companies is whether they can learn such lessons less painfully.  

Does this mean that boards should bend to every crank who berates them at an annual meeting? No, but companies should avoid dismissing every critic as a crank, and study the agitators for early warning signs of what may become groundswells.  

Executives love to talk about innovation and “first-mover advantage”. If they are serious, they should spend more time thinking about where today’s fringes suggest tomorrow’s mainstream will be. Sometimes a small and insubordinate section points the way for the community as a whole. 

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2 Why central bankers no longer agree how to handle inflation

Chris Giles, James Politi, Martin Arnold and Robin Harding in The FT 

Once, central bankers knew what they needed to do to handle inflation. As they grapple with the economic consequences of the coronavirus pandemic, the consensus on how best to foster low and stable price growth has broken down. 

After years of setting interest rates on the basis of inflation forecasts and seeking to hit a target of about 2 per cent, the leading monetary authorities around the world are pursuing different strategies. 

The OECD warned this week that “vigilance is needed”, but any attempt to raise interest rates should be “state-dependent and guided by sustained improvements in labour markets, signs of durable inflation pressures and changes in the fiscal policy stance” — so vague that every major central bank can say its policy meets the criteria. 

The US Federal Reserve has shifted its stance to give more leeway to inflation and greater priority to employment, the European Central Bank is embroiled in a row over whether to be more tolerant of any inflation overshoot, and the Bank of Japan is vainly battling to revive consumers’ price growth expectations. 

The US shift in strategy has been the most radical; last year Fed chair Jay Powell announced a new monetary framework. 

The Fed’s creed seeks to move away from decades of pre-emptive interest rate increases to stave off potential inflationary pressures while more doggedly pursuing full employment, a strategy that it argues will benefit more Americans, including low-wage workers and minority groups. 

It will allow inflation to overshoot its 2 per cent target for some time after a prolonged undershoot, in an attempt to ensure companies and businesses expect interest rates to remain low for a long time and will therefore spend rather than save. One of the Fed’s motivations is to avoid repeating its stance after the financial crisis, when policy tightening slowed the recovery. 

“I am attentive to the risks on both sides of this expected path,” said Lael Brainard, a Fed governor, on Tuesday. She would “carefully monitor” inflation data to make sure it did not develop in “unwelcome ways” but also “be attentive to the risks of pulling back too soon”, she said, warning that pre-pandemic trends of “low equilibrium interest rates [and] low underlying trend inflation” were “likely to reassert” themselves. 

But critics worry the Fed’s strategy was designed for a world of cautious fiscal policy, not the pandemic era of massive borrowing and spending, and that this could leave it behind the curve if price pressures build. 

Friday’s 3.1 per cent annual rise in the core personal consumption expenditure index reinforced some of those fears. 

The BoJ has been pursuing an inflation-overshoot commitment for the past five years, but has not even got close to its 2 per cent target. Strikingly little has changed after the pandemic: inflation is nowhere on the horizon and spending growth is sluggish. 

Japan’s households and companies are convinced inflation will remain near zero, making it all but impossible for the BoJ to achieve its goal. 

“The formation of inflation expectations in Japan is deeply affected by not only the observed inflation rate at the time but also past experiences and the norms developed in the process,” BoJ governor Haruhiko Kuroda said in a recent speech. 

Meanwhile eurozone policymakers are embroiled in a furious argument as the ECB conducts its own policy review; the results will be announced in September. 

Olli Rehn, who sits on the council as governor of Finland’s central bank, recently said: “From the point of view of economic and social welfare it makes sense to accept a certain period of [inflation] overshooting, while taking into account the history of undershooting.” 

But Isabel Schnabel, an ECB executive director, warned that would be risky. Schnabel said last month that although the central bank should not overreact if inflation overshoots after sluggishness, she is “sceptical” of formally targeting average inflation over a set period. 

“How long should the period be over which the average is calculated? How much of that should be communicated?” she asked. “I personally don’t think we should follow such a strategy.” 

For some economists, these disagreements are beside the point: monetary policy has become so extended that central bankers lack effective tools to do more. 

Richard Barwell, head of macro research at BNP Paribas Asset Management, said the ECB was almost “out of ammunition” and while eurozone inflation in May rose just above its target of near but below 2 per cent, it would take ambitious fiscal policy or simply luck to do so for a sustained period. 

“Unless there is some massive Biden-style fiscal stimulus coming down the road in Europe or the disinflationary headwinds suddenly dissipate, the amount of monetary stimulus needed to get inflation above 2 per cent is . . . well beyond what they can do,” he said. 

That leaves the Fed alone with a difficult choice in the months ahead. US inflation is overshooting its target, demand is rampant and it needs to decide whether to apply the brakes gently. 

Policymakers are poised to open a debate winding down some support, but they have shown no sign of wavering from their new policy framework, insisting the recent inflation rise is likely to be transitory, not sustained. 

Last week Fed vice-chair Randal Quarles said the framework was designed for the current world with “slow workforce growth, lower potential growth, lower underlying inflation and, therefore, lower interest rates”. 

“I am not worried about a return to the 1970s,” he said.