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Cognitive Dissonance Is Hurting Your Returns

Posted By Barry Ritholtz On July 25, 2014 @ 9:00 am In Cognitive Foibles,Investing,Psychology | 1 Comment

Regular readers know I enjoy discussing behavioral aspects of investing. The reasons for this are twofold: First, we can’t control the markets, but we can control our own reactions to it (at least we can try). And second, many studies have shown that investors suffer from a behavior gap between what they should garner in returns and what they actually get.

Of all of the failings of human wetware, the one I find most intriguing is cognitive dissonance [1]. You can find technical definitions at Changing Minds [2], The Skeptics Dictionary [3] or any number of other reference books.

In the context of economics and investing, my preferred definition is as follows: Cognitive dissonance occurs in the mind of an individual when a theoretical belief system is confronted by factual evidence demonstrating outcomes contrary to what theories dictate should occur.

Stated more plainly, when facts conflict with beliefs people find ways to ignore those facts, rationalizing them in a way that allows the disproven ideas to survive. John Kenneth Galbraith famously referenced cognitive dissonance before it was even called that, stating “Faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof.”

I was reminded of this recently courtesy of several seemingly disparate but cognitively-related articles.  Continues here [4]


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2014/07/cognitive-dissonance-is-hurting-your-returns/

URLs in this post:

[1] cognitive dissonance: http://bit.ly/1l0vXAH

[2] Changing Minds: http://changingminds.org/explanations/theories/cognitive_dissonance.htm

[3] The Skeptics Dictionary: http://skepdic.com/cognitivedissonance.html

[4] Continues here: http://www.bloombergview.com/articles/2014-07-25/your-mind-your-investment-returns

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