The Power of Cognitive Dissonance

Imagine this scenario: it’s the weekend. You go to your usual grocery store and you see that there’s a sale on your favorite package of cookies. The angel on your left shoulder tells you that you’ve been doing good at the gym, you’ve been eating right, and you don’t need the cookies. Then the devil on your right shoulder tells you to take the damn cookies and eat it all. You know you shouldn’t buy the cookies, but you do anyway and after half the package is done, you start having this thought in your head – “I shouldn’t have bought these cookies.”

At one point or another, every single person has had an experience similar to this. The “oh I should have done X, not Y” thought you feel when it happens is what is better known as Cognitive Dissonance. It’s that mental uneasy feeling you get when you hold one belief or value and do something else. It stems from Leon Festinger’s research as seen in A Theory of Cognitive Dissonance (1957) when he performed an observation study of a cult that believed the earth was going to be wiped out by a flood. These followers gave up everything when they joined the cult, and when this flood never happened, they began to have this uneasy feeling inside themselves.

In these kinds of situations, people are off balance with their mental thought process and typically react in one of four ways:

• 1) change their current behavior (“after this, I’m done with cookies”),
• 2) change the behavior of the conflicting thought (“I’ve been good this week, I deserve to treat myself”),
• 3) justify the behavior by bringing in new thoughts to make up for it (“I’m going to spend twice the amount of time at the gym tomorrow”), or
• 4) ignore the thought and enter a never-ending state of denial (“cookies aren’t bad at all”).

Smart companies realize this and adapt their products to reduce as much of this experience as possible. They identify gaps between what people want to believe and what their actions represent and manipulate it without anyone noticing, which is a sign of great marketing tactics. It’s what helped spark the e-cigarette industry (for people who know smoking is bad but see a less damaging alternative) and is seen in the 100-calorie pack craze.

In the finance world, cognitive dissonance is all too common. The thought of a rookie trader waiting for a stock to drop in price before buying, only to see the stock skyrocket is nothing unusual. Neither is their reaction to buy the stock when it’s increasing because they think it will only continue to increase, which is completely irrational. VCs are often caught in this trap when investing in hot trendy startups and not looking deep enough or long enough at the future. Investing based on emotion never ends well.

Cognitive dissonance is likely unavoidable, but we should do our best to learn from it when we have these experiences. It helps to be aware of how the introduction of new information affects our biases and whether it helps or harms our judgment. Confirmation bias can also be an anchor to our analysis, since whenever we do experience that mental uneasiness, our first instinct is going to be looking for ways to justify our decision. If we can limit cognitive dissonance, we will be much better off in the long run.