Definition
Cognitive dissonance occurs when new information contradicts an investor's existing position or belief. Rather than objectively reassessing, investors often rationalize: dismissing negative news, reinterpreting data to fit their narrative, or seeking confirming opinions. This prevents timely exits from deteriorating positions and honest evaluation of investment mistakes.
lightbulb Example
An investor who publicly recommended a stock that drops 40% finds it emotionally impossible to admit the mistake. Instead, they rationalize: "The market doesn't understand," "It's just temporary," or "Smart money is accumulating."
verified_user Key Points
- Mental discomfort from contradictory evidence
- Leads to rationalization rather than reassessment
- Prevents honest evaluation of mistakes
- Public commitments increase dissonance pressure