Behavioral Finance and Your Portfolio

3Belief Perseverance Bias #1: Cognitive Dissonance Bias

This above all: to thine own self be true, And it must follow, as the night the day, Thou canst not then be false to any man.

—Polonius to Laertes, in Shakespeare's Hamlet

Bias Description

Bias Name: Cognitive dissonance

Bias Type: Cognitive

Subtype: Belief perseverance

General Description

When newly acquired information conflicts with preexisting understandings, people often experience mental discomfort—a psychological phenomenon known as cognitive dissonance. Cognitions, in psychology, represent attitudes, emotions, beliefs, or values; cognitive dissonance is a state of imbalance that occurs when contradictory cognitions intersect.

The term cognitive dissonance encompasses the response that arises as people struggle to harmonize cognitions and thereby relieve their mental discomfort. For example, a consumer might purchase a certain brand of mobile phone, initially believing that it is the best mobile phone available. However, when a new cognition that favors a substitute mobile phone is introduced, representing an imbalance, cognitive dissonance occurs in an attempt to relieve the discomfort that comes with the notion that perhaps the buyer did not purchase the right mobile phone. People will go to great lengths to convince themselves that the mobile phone they actually bought is better than the one they just learned about, to avoid mental discomfort associated with their initial purchase. In essence, they persist ...