Uwe Reinhardt, an economist at Princeton, has a thoughtful explanation of why macroeconomists were so blindsided by the economic downtown of 2008:
Fewer than a dozen prominent economists saw this economic train wreck coming — and the Federal Reserve chairman, Ben Bernanke, an economist famous for his academic research on the Great Depression, was notably not among them. Alas, for the real world, the few who did warn us about the train wreck got no more respect from the rest of their colleagues or from decision-makers in business and government than prophets usually do.
How could the economics profession have slept so soundly right into the middle of the economic mayhem all around us? Robert J. Shiller of Yale University, one of the sage prophets, addressed that question in an earlier commentary in this paper. Professor Shiller finds an explanation in groupthink, a term made popularized by the social psychologist Irving L. Janis. In his book “Groupthink” (1972), the latter had theorized that most people, even professionals whose career ostensibly thrives on originality, hesitate to deviate too much from the conventional wisdom, lest they be marginalized or even ostracized.
If groupthink is the cause, it most likely is anchored in what my former Yale economics professor Richard Nelson (now at Columbia University) has called a “vested interest in an analytic structure,” the prism through which economists behold the world.
The best demonstration of groupthink in the lab is still the Asch conformity experiments from the 1950’s. The basic Asch paradigm is pretty straightforward: a subject is seated around a table with nine confederates who are actually “working” for the psychologist. The group is shown a series of cards containing lines of different lengths:
Each group member was then asked a variety of question about the lines, and told to indicate out loud which lines were longer than the others and which were the same length. The confederates, who gave their answers first, were told to give the wrong answer to several questions. For instance, they might insist as a group that the shortest line was actually the longest. This was the groupthink condition.
When no group pressure was present, subjects almost always gave the right answer – it’s not particularly difficult to determine which line is the longest. However, when the subjects were first exposed to a wrong answer endorsed by the group, they provided incorrect responses on more than 35 percent of the questions. 75 percent of the participants gave an incorrect answer to at least one question.
One day, economic historians will view the housing bubble, and the insistence of prominent economists that there was no bubble, as somewhat akin to the subject who says that the shortest line is actually the longest.
And here’s a video of a recreation of the Asch experiments.