Think Like the Great Investors: Make Better Decisions and Raise Your Investing to a New Level

Chapter 6

Love is blind (cognitive dissonance)

Have you ever noticed how some people seem to fall in love with a stock and stick with it through thick and thin? How they will maintain that it is a good investment, even in the face of the most convincing evidence to the contrary? Have you wondered why they don’t see that its fortunes have changed and sell it before they lose heavily on it?

Have you ever wondered why so many people bought risky stocks in the bull market leading up to the 2008 global financial crisis, only to lose it all when prices plunged or the companies went bust? Wasn’t the evidence clear that it was a dangerously overvalued market? Why did they buy such heavily indebted and overvalued stocks in the first place and why didn’t they sell before it was too late?

These are examples of people fooling themselves. The explanation of why they fool themselves lies in the theory of cognitive dissonance, developed by Leon Festinger in his 1957 book A Theory of Cognitive Dissonance.

Many people see the actions of investors and traders in the stock market as being driven by either fear or greed. These are very powerful emotional forces, but to understand the stock market only in these terms is too simplistic. Human beings are far more complicated and their motivations far subtler. The idea of cognitive dissonance is not a complete answer either, but it is another step towards ...