Please, Just Lie to Me! A Lesson on Financial Cognitive Dissonance

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;

Market Data: Week Ending, December 17, 2010

Market Index	2009  Close	12/17  Close	Week Change	Simple YTD %
Dow Industrials Avg	10428.05	11,491.90	0.72%	10.20%
S&P 500	1115.1	1,243.91	0.28%	10.36%
Fed Funds Rate	0.25%	0.22%	0.04%	-13.64%
10 yr T-note Yld	3.85%	3.33%	0.01%	-15.62%
5 yr T-note Yld		1.95%	-0.03%
5 yr TIPS - 'Real' Yld		0.01%	-0.13%
Implied 5 yr Inflation %		1.94%	0.10%
2 yr T-note Yld	1.14%	0.61%	-0.03%	-0.53%
2-10 Yr Slope	2.70%	2.72%	0.04%	0.02%
90 day T-bill Yld		0.10%	-0.02%
Gold ($/oz)	$1,096.95	$1,379.20	-1.14%	25.73%
WTI Oil ($/brl)	$79.36	$88.02	0.26%	10.91%
VIX "Worry Index"	21.68	16.11	-8.52%	-25.69%
Credit Spreads		12/17  Close	Week Change
Inv Grade Credit Idx		4.86%	0.06%
Low Grade Credit Idx		8.39%	0.08%
Markit CDX Inv Grd Idx		86	-2.27%
Markit CDX Mid Grd Idx		135	-1.46%

November 2010 Consumer Price Index

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1 percent in November on a
seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months,
the all items index increased 1.1 percent before seasonal adjustment.

The indexes for food, energy, and all items less food and energy all increased slightly in November. The
index for food at home rose in November after being unchanged in October, with the indexes for eggs
and nonalcoholic beverages both rising notably. Although the index for gasoline rose, the index for
household energy declined and the increase in the energy index was the smallest in five months.

The index for all items less food and energy rose in November after being unchanged the previous three
months. Increases in the indexes for shelter and airline fares accounted for most of the rise, while the
indexes for new vehicles, used cars and trucks, and household furnishings and operations all declined.

Over the last 12 months, the index for all items less food and energy has risen 0.8 percent. The energy
index has risen 3.9 percent over that span with the gasoline index up 7.3 percent but the household
energy index down 0.2 percent. The food index has risen 1.5 percent, with the food at home index up 1.7
percent.

Here is a link to the entire release from the BLS.

One Eye on the Fed: QE 2 Affirmed

This from Econoday/Bloomberg today in summary of the FOMC Meeting and their message to the public.

"Basically, the Fed still sees the need to continue with its plans for balance sheet expansion. In turn, the Fed maintained its position regarding continuing with $600 billion in QE2.

"To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month."

Kansas City Fed President Thomas Hoenig continued to dissent.

"Mr. Hoenig was concerned that a continued high level of monetary accommodation would increase the risks of future economic and financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy." The vote for the statement was 10 to 1.

The bottom line is that QE2 continues much as expected. This will continue to support economic recovery, eventual lower unemployment, and a more acceptable rate of inflation. On the news, markets were little changed as the statement largely met expectations in terms of rates and commentary."

The statement affirms the Committee's commitment to doing everything they can to reflate assets and reduce unemployment levels. Call this what you want, it is still bullish for assets in the short term.

Market Data: Week Ending December 10, 2010

Market Index	2009    Close	12/10   Close	Week Change	Simple YTD %
Dow Industrials Avg	10428.05	11,410.30	0.25%	9.42%
S&P 500	1115.1	1,240.40	1.28%	10.10%
Fed Funds Rate	0.25%	0.18%	-0.02%	-38.89%
10 yr T-note Yld	3.85%	3.32%	0.31%	-15.96%
5 yr T-note Yld		1.98%	0.37%
5 yr TIPS - 'Real' Yld		0.14%	0.29%
Implied 5 yr Inflation %		1.84%	0.08%
2 yr T-note Yld	1.14%	0.64%	0.17%	-0.50%
2-10 Yr Slope	2.70%	2.68%	0.14%	-0.02%
90 day T-bill Yld		0.12%	-0.01%
Gold ($/oz)	$1,096.95	$1,394.90	-0.81%	27.16%
WTI Oil ($/brl)	$79.36	$87.79	-1.57%	10.62%
VIX "Worry Index"	21.68	17.61	-2.22%	-18.77%
Credit Spreads		12/10   Close	Week Change
Inv Grade Credit Idx		4.80%	0.12%
Low Grade Credit Idx		8.31%	0.08%
Markit CDX Inv Grd Idx		88	-4.35%
Markit CDX Mid Grd Idx		137	-6.80%