Advisor Insights

How Cognitive Dissonance Thwarts Investment Decision-Making

Michael Pompian

This is the 14th article in the Behavioral Finance and Macroeconomics series exploring the effect behavior has on markets and the economy as a whole and how advisors who understand this relationship can work more effectively with their clients.

When presented with information that conflicts with pre-existing beliefs, people often experience mental discomfort--a psychological phenomenon known as cognitive dissonance. Cognitive dissonance is a belief perseverance bias, because humans tend to stick with ideas they already believe to be true. This is a very common and very human characteristic, and this concept is ever-present in the world of investment decision-making.