When I went to graduate school for finance I took a class on financial analysis. One of the main topics covered was financial forecasting as it related to stock prices and earnings. Before a publicly traded company releases its earnings, stock market analysts will predict for their clients what those numbers will be.
The reason for this is that if the analyst is right about his prediction, he can alert his clients about potential gains to be made. Given that it is inherently difficult to predict a company’s earnings from quarter to quarter, I naturally thought the analysts predictions would have a wide variety of different forecasts.
In reality, most analyst predictions were almost always the same. After thinking about it for a while, the answer became obvious. Analysts have families and a career to manage; so, if their picks are that far off from the consensus they could lose their job if and when shown to have been wrong. They learned early on to follow the pack in that it is hard to fire one analyst if all of the other analysts made the same mistake. So an analyst quickly learned not to stick your his or her head out lest it get chopped off.
After graduate school, I ended up trading bonds for Merrill Lynch on an emerging markets desk. Since we were an international group we had a smattering of foreigners with remainder being Americans. However whenever I walked around around to the other trading desks they were all staffed by Americans, with the preponderance of employees educated at Ivy League schools. Finance can get quite complex and some of the instruments that are traded require a deep understanding of math and finance. So I understood the need to hire “the best and the brightest.” What was unclear was why would a firm like Merrill Lynch hire the majority of their employees from Ivy League schools. This applied not only to Merrill Lynch but all the other main Wall Street banks as well.
This method of hiring from only a select set of schools was very different when I first applied to the Marine Corps Officer Program where selection was actually based upon a broad selection of officers with variety of backgrounds from a a broad array of schools. In my class alone there were officers from the Naval Academy, the Ivy Leagues, the SEC, as well as former Marines who earned their degrees via correspondence schools. The philosophy in hiring such a diverse set of people was that in a war time situation, it was better to have a broad selection of viewpoints. In that way group-think was unlikely to set in. There would always be somebody who would consider certain risks that others could not.
During the financial crisis of 2007-2008, all the major banks except one (JP Morgan) made the same mistakes that were to cause their financial ruin… the over leveraging of their balance sheets by holding mortgage bonds. A partial list of the financial institutions that either folded or merged during that period included: Lehman Brothers, AIG, Bear Stearns, Countrywide, Merrill Lynch, and Wachovia. I concluded that all of these banks believed in the false premise (among many others) that since all the mortgage bonds had an implicit guarantee by the government that they would not default. But the mortgage bonds did default and it created the financial destruction from which we have still not recovered.
Since the majority of all of these employees were educated at the same institutions and were trained philosophically in the same manner, they were not able to see a fatal mistake in the financial system that so many others could see (mainly hedge funds). This is the fatal flaw of group-think. Once everyone believes things to operate a certain way their minds remain closed to alternate viewpoints.
The people in these banks could not envision that the products that they sold and traded would destroy them.
At Merrill Lynch, the head of the mortgage market prior to the crisis in 2007-2008 was fired for expressing his concerns over this very issue. Instead of embracing his perspective and seeking his wisdom, developed over many years of successful trading, he was fired for not taking on more risk. Then, he was rehired after the damage had been done in the hopes that he could salvage the mess. By that time, of course, it was too late.
There is perhaps no more on-point, real-time example of the disastrous consequences that result from being unable or unwilling to listen to and acknowledge alternative viewpoints.