Leon Festinger and the theory of Cognitive Dissonance

Cognitive Dissonance is the feature of our personality whereby once we have formed a belief, we try our best to stay consistent with our belief and refuse to accept that we are wrong. In the process, we behave in an irrational manner, almost knowingly, just so that we can stay consistent with what we believe. Leon Festinger is best known for his theory of Cognitive Dissonance. He demonstrated that we are able to summon up considerable reserves of wishful thinking and selective memory in order to restore consistency. In a nutshell, Cognitive Dissonance is the mismatch between our beliefs and our behaviours. When confronted with disconfirming evidence, we tend to be in denial and work even harder to stay wrong, in the process refusing to remedy our mistake. In the world of Behavioral Investing, staying wrong is worse than being wrong. As such, the study of Cognitive Dissonance is critical. A very prominent example of Cognitive Dissonance occurred in Indian and American cities whereby Ganesh Idols were thought to be drinking milk. As the news spread, many devotees thronged temples to tray and ‘feed’ milk to the deity. It came to be known as the Hindu Milk Miracle. It epitomises the overlapping traits of Cognitive Dissonance and Group Think (herding).


‘Cognitive Dissonance is the mental condition in which people rationalise why their actions are inconsistent with their thoughts and beliefs’.

In 1954, Festinger heard about a woman named Dorothy Martin from a newspaper. She felt that she had been contacted by aliens from a planet named Clarion. The newspaper article was titled “Prophecy from planet Clarion call to city, flee that flood.” Her messages said that the world would end in a great flood before dawn on December 21, 1954. She gathered followers and Festinger and his colleagues infiltrated them in 1954. Many of the followers had taken strong actions to show commitment to the belief. They left jobs, colleges, and spouses, and had given away money and possessions to prepare for their departure on a flying saucer which was to rescue the group of true believers.

Festinger thought that when the world did not end it would lead to the arousal of dissonance in the followers. Changing their belief would be difficult because they were committed at considerable expense. Another option would be to enlist social support for their belief. Festinger wrote, “If more and more people can be persuaded that the system of belief is correct, then clearly it must after all be correct.” Festinger and his colleagues predicted that the inevitable disconfirmation would be followed by an enthusiastic effort at proselytising to seek social support and lessen the pain of disconfirmation.

On December 20 the group gathered and expected a visitor from outer space to come at midnight and to take them to a waiting spacecraft. The group removed all metallic items from their persons. By midnight all zippers, bra straps, and other objects are discarded. At 5 minutes after midnight no one had come. A different clock said it was only 11:55. They decided that one must be right. At 12:10 the other clock strikes and no one comes. They sit in silence visibly upset until 4 am. They believe the world will end in the morning. At 4 am, the leader begins to cry. Some try for different explanations and excuses. None work. At 4:45 am Mr Martin gets another message. It says that God has decided to spare the planet from destruction. It says “The little group, sitting all night long, had spread so much light that God had saved the world from destruction.” On the afternoon of that day they call newspapers and start spreading their message. The group begins an urgent campaign to spread its message to as broad an audience as possible.

In his book Festinger said that 5 conditions must be met and these have evolved over the years. His conditions were:

  • A belief must be held with deep conviction and it must have some relevance to action.
  • The person holding the belief must have committed himself to it. He must have taken action that is difficult to undo. In general, the more important such actions are, and the more difficult they are to undo, the greater is the individual’s commitment to the belief.
  • The belief must be sufficiently specific and sufficiently concerned with the real world so that events may unequivocally refute the belief.
  • Such undeniable dis-confirmatory evidence must occur and must be recognized by the individual holding the belief.
  • The individual believer must have social support. If the believer is a member of a group of convinced persons who can support one another, the belief may be maintained and the believers may attempt to proselytise or persuade non-members that the belief is correct.

Dan Ariely on how Cognitive Dissonance is used in a productive manner

Example of Cognitive Dissonance

How to combat Cognitive Dissonance?

The unique thing about Cognitive Dissonance is that it is relatively easy to spot dissonance in other peoples behaviour, but we are unable to see it in our own behaviour. As a result, combating Cognitive Dissonance is not easy and all of us have to make a very conscious attempt at doing so. Being open minded and willing to change is one of the best ways of combating Cognitive Dissonance. There are three tips which we can use:

  • Change your behaviour. For a person who knowingly smokes or drinks, it might be difficult to change his or her behaviour. But in other cases where there is no substance abuse, it is easily possible to change ones behaviour.
  • Change your beliefs. It is possible to change one’s beliefs by being inquisitive and by reading relevant material that does not agree with your opinions. We are wired not to learn or seek anything that disagrees with our prior convictions, and that leads to an increase in our Cognitive Dissonance.
  • Justify your beliefs and your behaviours. I call this the ‘man in the mirror’ effect. If you believe in climate change for example, what are you doing about it? If you read the lyrics of Michael Jackson’s very famous song titled ‘Man in the Mirror’ while you listen to the song, you can find ways to combat your dissonance.

Scott Adams on Cognitive Dissonance

Cognitive Dissonance is pretty tricky because many a time, we believe that the other person is dissonant, when in fact it is our own dissonance that we are unable to identify. The following will be helpful.

What is a Heuristic?

A Heuristic is a mental shortcut that allows us to solve problems quickly. Heuristics are rules of thumb that shorten the decision-making process. Are heuristics useful when we invest? The short answer is that it depends on how we use them. When a short-cut or a heuristic fails to work, it leads to a cognitive bias.

Herbert Simon & Bounded rationality

Herbert Simon was the an American economist who did a lot research in how humans make decisions in the real world. His work in the field of Cognitive Psychology and Artificial Intelligence was the first of its kind. The proponents of the Efficient Market Hypothesis were Economists who assumed that human beings make perfectly rational decisions after considering all the facts and weighing the risks and the rewards. Simon did not agree.

Simon‟s approach to decision making essentially consisted of three main assumptions:

  • decisions are not performed by agents with perfect rationality, they are made by agents with bounded rationality;
  • the quality of decisions vary as a function of the expertise of the decision maker;
  • to understand decision making, it is paramount to investigate the cognitive processes involved; that is, an analysis based on performance only is not sufficient. In other words, one cannot judge the quality of a decision based on the outcome. In the stock market, many times, wrong processes lead to profitable outcomes and vice versa. Just because you or I profited from a trade, it does not follow that we made the correct decision.

According to Simon, we do not optimize our decision-making process and it follows that the decision we make are not always correct. Instead of optimising, what we tend to do is to ‘satisfy and suffice’. Simon propounded the concept of ‘Bounded Rationality’. Bounded Rationality deals with how humans make decisions in an uncertain world. The following pointers may help:

  • In the world we live in, the amount of data that we have access to is way beyond what we can compute or use to arrive at an accurate decision.
  • In the real world, the exact quantum of risk cannot be computed since there are many ‘unknown unknowns’.
  • Because of the above, humans have adopted a set of shortcuts that are called heuristics. The primary reason that we use a heuristic is because of the fact that it is not always possible to use complicated decision-making models in the real world.
  • Heuristics are not always inaccurate. In fact, more often than not, heuristics are quicker and more effective than other forms of decision making.
  • In other words, bounded rationality is about survival and is the practical manner in which we take decisions in the real world. We do not maximize he said, we satisfice. To satisfice means to chose a good enough option, not the best option.
  • Unfortunately, this definition of rationality as a survival instinct does not work in the stock market. In the stock market, rationality is risk management.