DEFINITION of 'Cognitive Dissonance'
The unpleasant emotion that results from believing two contradictory things at the same time. The study of cognitive dissonance is one of the most widely followed fields in social psychology. Cognitive dissonance can lead to irrational decision making as a person tries to reconcile his conflicting beliefs.
BREAKING DOWN 'Cognitive Dissonance'
Let's say an investor decides in advance that he is going to purchase shares of a firm when the price drops to $78 a share. The price is currently at $80 a share. All of a sudden, the company's stock price starts going up. The investor's belief that the stock would be a good buy at $78 seems to be contradicted by the stock's current behavior. The investor decides to buy at $85 instead of $78 to reconcile the cognitive dissonance he is experiencing. This may not be as good of an investment decision, but the investor will rationalize himself into thinking it is, mainly to get rid of his feeling of cognitive dissonance.