What Is Cognitive Dissonance?

Cognitive dissonance is the unpleasant emotion that results from holding two contradictory beliefs, attitudes, or behaviors at the same time. The study of cognitive dissonance is one of the most widely followed fields in social psychology. The failure to resolve cognitive dissonance can lead to irrational decision-making as a person contradicts their own self in their beliefs or actions.

Key Takeaways

  • Cognitive dissonance occurs when a person believes in two contradictory things at the same time.
  • Within investing and in other areas, failing to resolve it can lead to irrational decision-making.
  • Typically the person experiencing cognitive dissonance attempts to resolve the conflicting beliefs so that their thoughts once again become linear and rational.

Understanding Cognitive Dissonance

Conflicting beliefs can be held at the same time, often without a person realizing it. This is particularly true when conflicting beliefs deal with different areas of life or are applied to separate situations. When a situation causes the person to become conscious of their conflicting beliefs, cognitive dissonance occurs and creates an uneasy feeling. The person experiencing the dissonance will work to resolve one of the conflicting beliefs in order to reduce or eliminate the cognitive dissonance so their thoughts are once again linear and rational.

The process of resolving cognitive dissonance by changing beliefs or behaviors is a major topic of study in psychology as a means to affect personal and social change. People can resolve cognitive dissonance by changing their existing beliefs, adding new beliefs, or reducing the importance of beliefs.

For example, an environmental advocate who believes in the danger of anthropogenic climate change, but travels around the world in a private jet may experience cognitive dissonance when the disproportionately high carbon emissions they create are pointed out to them. She may resolve this cognitive dissonance by changing her belief in climate change, by adding a new belief that she is more important than other people in some way and that this justifies her out-sized carbon footprint, or by deciding that the danger of climate change is simply not that important to her.

The concept of cognitive dissonance has applications to investing. One study suggests that the observation that people do not always treat sunk costs as irrelevant to marginal decisions at least in part due to cognitive dissonance.

Economists argue that it is irrational to continue throwing money into an investment, or any project, that is failing and call doing so the "sunk cost fallacy". Yet some investors can be observed to make this kind of irrational decision. The study argued based on survey evidence that an individual trader's future decision-making may be influenced by his previous investment decisions. As such, his future decisions, which may be contrary to his investing beliefs, are taken to reaffirm the amount of time and money he has invested in his previous ones.

Example of Cognitive Dissonance

For example, an investor believes heavily in the "sell in May and go away" market anomaly. The investor thinks that people sell stocks in May and it causes prices to be artificially depressed. Therefore, you shouldn't ever sell stocks in May because the selling bids down prices and you can't ever get the best price.

Separate from this thought, the investor receives a call from his broker, whom he trusts, about a stock he owns. Apparently, the company is going through a hostile takeover and the stock price has started to fall. The broker thinks this is only the tip of the iceberg and that the investor should immediately sell the stock.

The investor is on board until he looks up at his calendar and sees it is May 1. The investor immediately thinks of the "no selling in May" guideline and starts to experience anxiety related to cognitive dissonance over the conflict between his prior belief and the advice from his trusted broker. The investor will have to find a way to reconcile these to be at peace with whatever decision he reaches. He may decide to discard his belief about selling in May, to revise it into a general rule with specific exceptions, or to stick with his prior belief and downplay the value of his broker's advice or trustworthiness.