Cognitive Dissonance

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.

RELATED TERMS
  1. Base Rate Fallacy

    Base rate fallacy, or base rate neglect, is a cognitive error ...
  2. Anchoring and Adjustment

    Anchoring and adjustment is a cognitive error described by behavioral ...
  3. Exit Point

    The price at which an investor sells an investment. The exit ...
  4. Confirmation Bias

    A psychological phenomenon that explains why people tend to seek ...
  5. Trading Psychology

    The emotions and mental state that dictate success or failure ...
  6. Entry Point

    The price at which an investor buys an investment. The entry ...
Related Articles
  1. Investing

    9 Cognitive Biases That Affect Your Business

    Human beings often act irrationally when it comes to business decisions. Behavioral finance explains the difference between what we should do and what we do.
  2. Active Trading Fundamentals

    Why Investors Stick With Failing Stocks

    Investors often delude themselves into sticking with bad decisions. Find out why this happens and how you can avoid this trap.
  3. Investing Basics

    Behavioral Bias - Cognitive Vs. Emotional Bias In Investing

    We all have biases. The key to better investing is to identify those biases and create rules to minimize their effect.
  4. Investing

    Key Executives Are Buying Shares Of These 6 Firms

    When it comes to insider activities, actions speak louder than words. Too often, we see a company issue a bullish outlook while company executives and directors are unloading large blocks of ...
  5. Active Trading Fundamentals

    Behavioral Finance: Introduction

    By Albert PhungAccording to conventional financial theory, the world and its participants are, for the most part, rational "wealth maximizers". However, there are many instances where emotion ...
  6. Investing

    The Science of Making Better Investment Decisions

    Neuroeconomics attempts to bridge neuroscience, cognitive psychology and economics in order to understand the mechanisms underlying economic decision making.
  7. Retirement

    Should You Pay Someone to Create a Retirement Plan?

    Nobody likes to pay for help, but it may be necessary to shell out the extra cash for proper retirement planning help.
  8. Active Trading

    Finding Success Where Indicators Fail

    Trade what you see: Follow the charts, buy breakouts and honor stops. We'll look at a case study to show you how.
  9. Investing News

    Why The Best Financial Advisor Might Be You

    Many people enlist expert advice when dealing with their finances. But could going it alone be the best option?
  10. Investing Basics

    A Quick Guide On Behavioral Funds

    Investopedia explores the working of behavioral funds, their benefits and risks, and an analysis of their past returns.
RELATED FAQS
  1. What is long-term care insurance?

    Long-term care insurance is an insurance policy that that helps a patient pay for long-term care. The policy usually covers ... Read Answer >>
  2. What are some of the limitations and drawbacks of economics as a field?

    Find out why the field of economics is full of controversy. Policy decisions, political campaigns and personal finances are ... Read Answer >>
  3. What caused Black Monday, the stock market crash of 1987?

    Find out about the factors behind the stock market crash of 1987, also known as Black Monday, when the Dow Jones Industrial ... Read Answer >>
  4. How can an investor profit from a fall in the price of bank stocks?

    Discover the main ways to take advantage of a fall in bank stocks. Shorting stocks and buying put options can let traders ... Read Answer >>
  5. What was the first stock Warren Buffett ever bought?

    Learn some the important basic principles of investing that are illustrated by Warren Buffett's first experience in the world ... Read Answer >>
  6. What are common investing mistakes in bear markets?

    Learn why investing in a tumultuous market can be challenging even for the most experienced investors. Avoiding these common ... Read Answer >>
Hot Definitions
  1. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  2. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  3. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  4. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
  5. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  6. Treasury Inflation Protected Securities - TIPS

    A treasury security that is indexed to inflation in order to protect investors from the negative effects of inflation. TIPS ...
Trading Center