First contributed by: Anonymous, aka: Curious George on 12/1/2009
What is cognitive dissonance?
Anxiety
that results from simultaneously holding contradictory or otherwise
incompatible attitudes, beliefs, or the like, as when one likes a person
but disapproves strongly of one of his or her habits. (Dictionary.com)
It’s
not so much the definition of cognitive dissonance but rather how we
respond to it that is important. If investment decisions are built on
untruths, results will suffer. Every day we are presented with
conflicting information and we are conflicted in what to believe. If one
wants good investment results then good information really does matter.
So, where is the truth?
Social psychologist Leon
Festinger says “Dissonance and consonance are relations among cognitions
that is, among opinions, beliefs, knowledge of the environment, and
knowledge of one's own actions and feelings. Two opinions, or beliefs,
or items of knowledge are dissonant with each other if they do not fit
together; that is, if they are inconsistent, or if, considering only the
particular two items, one does not follow from the other” (Leon
Festinger 1956: 25).
His three ways of dealing with cognitive dissonance
1. One may try to change one or more of the beliefs, opinions, or behaviors involved in the dissonance;
2.
One may try to acquire new information or beliefs that will increase
the existing consonance and thus cause the total dissonance to be
reduced; or,
3. One may try to forget or reduce the
importance of those cognitions that are in a dissonant relationship
(Festinger 1956: 25-26).
Let’s try a real world example
After
subprime mortgages melted down and delivered a severe blow to the
economy, our economy is growing again and we are on the mend. The stock
market reflects this belief and there is plenty of economic data that
supports this position. If this is true then time will once again bail
out investors from their ‘100 year storm’ losses for the second time in
10 years. This is what many of us believe. The market always recovers.
Don’t time the market. If you miss the 10 best days… blah, blah blah.
So
far so good. Now let’s add the conflicting information. On 11/30/09,
U.S Debt Clock.org shows approximately $12 trillion in national debt and
unfunded liabilities of $106 trillion totaling $118 trillion of total
debt. Total annual GDP is approx $13 trillion. Total annual tax revenue
is $2 trillion. We plan $1 trillion annual deficits for the next 10
years according to the government.
Total debt to
revenue ratio is 59. If a household earning $100,000 annually had a debt
to revenue ratio of 59, they would be $5.9 million in debt. This would
be a problem.
Today total federal taxes are 15% of
GDP. To eliminate the budget deficit taxes would need to increase 67%
with no decrease in GDP to fix the problem. Does anyone believe this
would fix our budget problem?
So, we have one stream of
information sent to us every day telling us things are going to be fine
or at least not so bad. Then there is this other set of facts that
scream disaster. I don’t know about you but I am feeling anxious. This
is cognitive dissonance. Now, review the three responses.
1. Change one of your beliefs to create consonance (harmony). Which stream of information do you believe?
2. Find new information to create consonance.
3. Try to forget about the information creating the dissonance or reduce its importance.
Response #1 means we judge some information and information sources as more relevant than the others.
Response #2 means we do more research.
Response #3 devolves into avoidance, Pollyanna, name calling or kill the messenger.
How
we respond to cognitive dissonance may determine how successful we are
and perhaps our financial survival. We don’t have to like it but we do
have to deal with it.