Cognitive dissonance

In psychology, cognitive dissonance is an uncomfortable feeling or stress caused by holding two contradictory ideas simultaneously. The theory of cognitive dissonance proposes that people have a fundamental cognitive drive to reduce this dissonance by modifying an existing belief, or rejecting one of the contradictory ideas.

Often one of the ideas is a fundamental element of ego, like “I am a good person” or “I made the right decision.” This can result in rationalization when a person is presented with evidence of a bad choice, or in other cases. Prevention of cognitive dissonance may also contribute to confirmation bias or denial of discomforting evidence. If not corrected, this can lead to further bad choices for the sake of consistency, rather than learning from mistakes.

When I started this blog, I made a promise to be honest about mistakes and poor predictions. As an analyst, market pundit, blogger or armchair philosopher of markets, we will all eventually be faced with events that contradict our previously held beliefs. And, let me tell you, when one’s bad calls are out there, plain for everyone to see, one may well be able to fool oneself with one’s rationalising drivel, but no one else is fooled.

My most recent real moment of truth came in 2002-2003. After correctly calling the 2001 recession right to the month and the magnitude of the losses in Nasdaq, I went on to predict a housing would stumble as a result of the tech bubble’s unraveling, prolonging the downturn. Ultimately, I held on to this belief for too long as the economy recovered and the housing bubble actually began in earnest.

Here I was, presented with dissonant information, calling my very 2-year market thesis into question. It took a number of months, but I came to a good place and was able to pivot quickly and made the right asset allocation calls to benefit from the upswing. Yet, the incident left me a bit scarred. It highlighted for me how easy it is to become ego-driven and refuse to absorb new information objectively.

Going forward, I reckon this particular economic cycle and market will be tricky to navigate. And I expect to make a number of atrocious calls. But, I also expect to own up to them, and I equally expect you to call me on them well.

So, let’s not let a little thing like cognitive dissonance get in the way of our playing a positive (albeit minor) role in helping to surface and work through the most important issues our leaders have faced in at least two generations. It should be fun.

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