I am sure many of you have heard the famous Aesop’s fable about the fox and the grapes. If not, here’s a quick recap of the story.
A fox sees some high-hanging grapes and wishes to eat them. When it is unable to think of a way to reach them, it decides that the grapes are not worth eating. The fox then justifies that the grapes are not ripe or they are sour (hence the common phrase ‘sour grapes’).
Every time I hear this story, I laugh at the delusional fox. However, I rarely imagine that a similar fox is inside me also. The fable is a classic illustration of what psychologists call Cognitive Dissonance.
Behavioural scientists define cognitive dissonance as the feeling of mental discomfort or tension produced by the combined presence of two thoughts, ideas, beliefs, attitudes, or opinions that are psychologically inconsistent. The greater the discomfort, the greater the desire to reduce the dissonance of the two cognitive elements. Dissonance theory suggests that if individuals act in ways that contradict their beliefs, then they typically will change their beliefs to align with their actions.
In case of Aesop’s fox, an inconsistency arose when the fox set out to do something and failed to accomplish it. He could resolve this conflict in one of three ways: (a) by somehow getting at the grapes, (b) by admitting that his skills are insufficient, or (c) by reinterpreting what happened retrospectively. The last option is an example of cognitive dissonance, or, rather, its resolution.
The cognitive dissonance theory was developed in 1957 by Leon Festinger, who observed in a series of experiments that people would change their attitudes to make them more consistent with actions they had just taken. Cognitive dissonance is one of many behavioural biases that evolution has wired into the human brain.
In the ancient hunter-gatherer environment, if a man saw something vague it was important for him to get rid of the doubt (whether it was a harmless rabbit or a dangerous panther) immediately. A quick decision was essential for survival. This trait gave an evolutionary advantage to human beings.
But evolution is a slow process and it hasn’t caught up with the rapid changes in our environment. In the modern world, there are hardly any such life threatening situations, but the brain’s hard wiring hasn’t changed much in last few thousand years. So we continue to take decisions under the influence of many of the psychological reflexes.
Smoke That Clouds The Rationality
One of the best examples of cognitive dissonance that you can see around is people who continue to smoke even after being aware of the harmful effects of smoking. How do they deal with this conflict between what they know and how they act?
They would tell themselves, “Well, I’ve tried to quit and it’s just too hard.” Or, “It’s not as bad as they say and besides, I really enjoy smoking.” And of course the best one I have heard so far – “Because of smoking, I get a chance to take deep breaths. And deep breathing is good for health.” This is downright hilarious!
Habitual smokers justify their behaviours either through rationalizations or through denials, just as most people do when faced with cognitive dissonance. And it’s just insane when you see doctors themselves suffering from this. Nassim Taleb, in his book Fooled by Randomness, writes –
…the best way to understand how we could be rational in our perception of risks and probabilities and, at the same time, be foolish while acting on them would be to have a conversation with a cigarette smoker. For few smokers remain unaware of the lung cancer rates in their population. If you remain unconvinced, take a look at the huddling smoking crowd outside the service entrance of the Memorial Sloan-Kettering Cancer Center in New York City’s Upper East Side. You will see dozens of cancer nurses (and, perhaps, doctors) standing outside the entrance with a cigarette in hand as hopeless patients are wheeled in for their treatment.
Notice the pattern – one desires something, finds it unattainable, and reduces his dissonance (psychological discomfort) by criticizing it. In simple terms, it’s nothing but a lie that we keep telling ourselves and it’s so sad that all this while we’re aware that it’s a lie. But it’s not very uncommon.
If you think above comic strip is funny, there’s a company called Zappos, a subsidiary of Amazon, which uses the insights from cognitive dissonance to boost the job satisfaction in employees. Dan Ariely, author of Predictably Irrational, explains Zappos’ trick in this video –
Consider this common phenomenon which every investor has experienced at least once. Immediately after buying a stock, an investor comes under a strong psychological force called endowment effect which states that when you own something, a stock in this case, you start to value it more. Any positive information related to the stock validates his initial purchase decision and he tends to give more weight to such confirming evidence (confirmation bias).
Any subsequent drop in the stock price because of negative news give rise to the possibility that his or her initial decision was wrong. This creates a cognitive dissonance in investor’s mind and the way he typically resolves it by buying more to remain consistent with his original commitment rather than rationally re-evaluating his earlier decision in the light of new facts.
The famous Canadian economist John Kenneth Galbraith understood this very well. He stated –
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.
Charlie Munger has another term for this bias – Doubt Avoidance Tendency. Munger explains this with a brilliant analogy. He explains this with a brilliant analogy. He says human brain works like a human egg. When a sperm gets into a human egg, there’s an automatic shut-off device that bars any other sperm from getting in. This reminds me of the saying –
There is nothing more dangerous than an idea if it’s the only one you have.
Overcoming Cognitive Dissonance
The first step is to bring the awareness that there exists a problem. As Warren Buffett wrote in his 1991 letter to shareholders –
The most important thing to when you find yourself in a hole is to stop digging.
Recognize and accept that you are in a hole that you have made a mistake. Don’t close your eyes and go into a denial mode. Understand that this behavioural bias is nothing less than self-deception. A man who has committed a mistake, says Confucius, the Chinese philosopher, “and doesn’t correct it, is committing another mistake.”
The second step is to actively look for disconfirming evidence. English economist John Maynard Keynes asks –
When the facts change, I change my mind. What do you do, sir?
Don’t fall in love with your ideas so much that it keeps you stuck in a losing cause. The stock doesn’t know that you own it. Sometimes investors take the idea of long term investing to an extreme. They forget that they need to constantly re-evaluate their positions and change them as situations require and new data becomes available.
Charlie Munger’s insights on this are invaluable –
The ability to destroy your ideas rapidly instead of slowly when the occasion is right is one of the most valuable things. You have to work hard on it. Ask yourself what are the arguments on the other side. It’s bad to have an opinion you’re proud of if you can’t state the arguments for the other side better than your opponents. This is a great mental discipline.
One of greatest scientists and thinkers, Charles Darwin, was aware of these natural quirks of human mind. While working on his theory of evolution, he paid special attention to disconfirming evidence, particularly when it disconfirmed something he believed and loved. The moment he found disconfirming evidence or encountered a conflicting thought, he would immediately write it down. He knew that his brain could conveniently forget about it very soon.
It’s not easy to follow Darwin-like discipline but it won’t hurt if you could make use of some tools. Checklist is one such tool for dealing with not only cognitive dissonance but many other cognitive errors.
Another useful trick comes from success coach and bestselling author Brian Tracy who suggests the idea of “zero based thinking”. Before every important decision ask yourself this –
“Is there anything in my life that, knowing what I now know, I would not start up again today, if I had to do it over?”
If you answer is yes, then figure out how to get out of your current situation as fast as possible. Prof. Sanjay Bakshi suggests the same thing when it comes to stock market investing –
People need a way to de-bias themselves and one good way to do that is to mentally liquidate the portfolio and turn it into cash and then, for each security, ask yourself, “Knowing what I know now, would I buy this stock?
Often the honest answer would be a most certain “no”. Then the next question you have to face is – “Then why do I own it now?
When it comes to cognitive dissonance and for that matter any other behavioural bias, it’s important to know that you don’t have to fight them all the time. You only need to use your tools when the stakes are high.
Now, let’s invert the problem. Instead of dealing with cognitive dissonance, can we avoid it altogether especially in stock market investing? The answer is yes.
People who look at their portfolios frequently are the ones who get hit by ill-effects of cognitive dissonance heavily. Every time your portfolio shows losses (which it invariably will because of volatile stock prices), it creates psychological pain for you. Higher the frequency of looking at your portfolio, greater is the pain.
When you know that you have bought the stock for long term, you only need to re-evaluate the fundamental changes in business once a year or may be once a quarter. Minute by minute stock price updates don’t help you, they just drain you mentally.
Upside Of Cognitive Dissonance
As I explained earlier, nature has ingrained every mental bias in human brain for a reason and these biases aren’t always bad. So cognitive dissonance is not an outright evil thing. It too has an upside to it.
The two competing entities in cognitive dissonance are facts and human belief. We saw how our brain, to remove cognitive dissonance, changes and aligns the belief to the action. But it can be other way round also. You could force your action to align with your beliefs. How?
Have you have heard of the phrase ‘fake it till you make it?” This gives a clue how you can use cognitive dissonance for your advantage. Affirmations or positive self-talk are psychological tools designed to improve the performance in almost every known field of human endeavour.
When you have set a goal for yourself, despite your present shortcomings, you force your brain to imagine overcoming your limitations. Although the force of cognitive dissonance makes it difficult to practice, there are countless professional athletes who have used this technique successfully.
However, when you’re being optimistic, don’t ignore the facts. Be aware that there is a fine line separating optimism and delusional optimism.
The brain we have on the top of our head isn’t a flawless machine. It is definitely powerful, but it has its weaknesses which in everyday terms, is known as ‘biases’. And all cognitive biases, including cognitive dissonance, are mental handicaps that come with being human. They can distort our perception of reality.
So we need to be aware and equipped to deal with these biases, especially in high stake situations.
Take care and keep learning.