It makes sense that investors would seek out pleasure and avoid pain but problems arise when cognitive dissonance plays a role in this avoidance. The concept of cognitive dissonance, developed by psychologist Leon Festinger in the 1950s, arises when a person holds two different beliefs that are inconsistent with one another. The theory is that when this happens it causes our minds discomfort which we then seek to reduce.

Written by Ben Carlson (awealthofcommonsense.com)

In a great book by Meir Statman entitled What Investors Really Want he says the following regarding what most investors are looking for:

1. We want high returns from our investments, but we want much more.
2. We want to nurture hope for riches and banish fear of poverty.
3. We want to be number 1 and beat the market.
4. We want to feel pride when our investments bring gains.
5. We want to avoid regret that comes with losses.
6. We want the status and esteem of hedge funds.
7. We want the warm glow and virtue of socially responsible funds.
8. We want the patriotism of investing in our own country.
9. We want good advice from financial advisors, magazines, and the Internet.
10. We want financial markets to be fair but search for an edge that would let us win, sometimes fair and at other times not.
11. We want to leave a legacy for our children when we are gone.
12. We want to leave nothing for the tax man.

The sum of our wants and behaviors make financial markets go up or down as we herd together or go our separate ways, sometimes inflating bubbles and other times popping them.

Cognitive Dissonance

This is one of the better explanations I’ve seen on the behavioral psychology of investors as a whole. It makes sense that investors would seek out pleasure and avoid pain but problems arise when cognitive dissonance plays a role in this avoidance. The concept of cognitive dissonance, developed by psychologist Leon Festinger in the 1950s, arises when a person holds two different beliefs that are inconsistent with one another. The theory is that when this happens it causes our minds discomfort which we then seek to reduce.

Cognitive dissonance theory goes hand-in-hand with confirmation bias, which is where we seek only those opinions that agree with our own line of thinking. This is why it can be so difficult to get people to change their minds.

The reason this happens makes sense when you think about it. Humans have evolved over time to avoid discomfort, so when we encounter issues that we disagree with it’s much easier to simply ignore them or classify them as being wrong without putting too much thought, effort or reasoning into it. An alarm bell usually goes off in our head alerting us to this inconsistency, so we give ourselves a mental break to avoid these internal conflicts...

I think the idea of consistency can help when implementing good habits, but it can hurt when viewed through the lens of cognitive dissonance. The free flow of information these days should make it easier than ever for people to become more informed but what it’s done to many people is give them more sources of confirmation bias.

There are a few ways around this problem:

• Self-awareness
• Humility
• Challenging your own deeply held beliefs
• The willingness to discuss or read stuff you don’t agree with to see the other side
• Trying to put yourself in someone else’s shoes

Conclusion

It feels like people are becoming more closed-minded these days so it seems to me that it will turn out to be a huge advantage to stay open-minded when everyone else around you becomes more closed off.