What is cognitive dissonance?

Actually the question should be why as an investor / wealth creator should you be aware of this!

Cognitive dissonance is our need to justify all our actions – even if we know that it is not worth justifying. It is easier to see examples of what is cognitive dissonance.

We know: Smoking tobacco is bad for health

We need to smoke – so what do we do?

We tell ourselves: “I have had a tough day in office, I must smoke, NOW!!

We do smoke.

We think we should ONLY buy good quality equities at fair prices…….

So we keep waiting………….then our friend tells us ‘KS oil / Gvk / Gmr infra  aaj chalnewala hai’.

When you hear whispers your mind converts them to SCREAMS….

So you go and buy let us say GMR infra fro Rs. 40 – and you buy 1000 shares. You feel smug about it.

Then prices go down. YOU AVERAGE (your broker friend convinces you – after all how much can you lose in a Rs. 30 share) ….

Then you meet Subra at a party…and TEL HIM ‘Infra is good I think…I bought GMR…

and I say ‘but i do not invest in a company HQed at Hyderabad…(eeks Subra!!)

Then GMR is at 19…

He meets and tells me ‘It is ok Subra…it is only 5000 shares’. This is Cognitive dissonance. Justifying WHATEVER YOU WANT, even if it contradicts what you SHOULD do…

If you have decided that buying a house is smarter than renting….all the calculations on my blog is Cognitive Dissonance

If you are a trader, have a stop loss – so a GMR at 40 for a trader should have MEANT he should have a stop loss – at whatever price, NOT averaging.

If you are an investor, and still buy GMR at a price of 50, learn valuation again..

http://www.subramoney.com/2010/11/if-people-disagree-what-do-you-do/