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Cognitive Dissonance

Cognitive dissonance is the state of having inconsistent thoughts, beliefs, or attitudes. These inconsistent beliefs can cause stress and lead to poor decision-making.

According to one expert in cognitive dissonance, Leon Festinger:

“We hold many cognitions about the world and ourselves; when they clash, a discrepancy is evoked, resulting in a state of tension known as cognitive dissonance. As the experience of dissonance is unpleasant, we are motivated to reduce or eliminate it, and achieve consonance (or agreement).”

We are said to try and reduce cognitive dissonance in three main ways:

First, we might change our behavior or our beliefs to balance out the dissonance in our life.

For example, by taking up a new religion or by giving up a bad habit.

Second, we might seek out new information that contradicts the dissonant beliefs. This can sometimes lead to a type of unhealthy rationalizing.

For example, someone who drinks a lot of alcohol will face dissonance by a claim that alcohol causes illness. Thus, the dissonant person may search out reports that claim alcohol is good for you, or that illness claims are lacking in evidence. They seek to ignore any information that does not support their views even if the information is available and truthful.

Third, we might reduce the importance of the dissonant beliefs, thus making them not so much of a big deal in the first place.

For example, someone who smokes cigarettes may face dissonance because smoking can shorten life expectancy. The smoker might then diminish the importance of long life and claim it's better to anyway live a short life full of pleasure than a long life devoid of any joy. Cognitive dissonance can occur in all walks of life but it also has a psychological effect in financial trading partly because there is money involved. Whenever there is cognitive dissonance, there is bound to be indecision.

Here are some Examples In Trading:

● I know I should hold on to this stock but what if it turns into a loss? ● I know I’m supposed to wait for the perfect trade opportunity but I'm bored of watching the screens and I’m itching to trade. Plus, I need to pay the bills with my winnings. ● I've lost a lot of money in the markets and it’s painful, but I've learned to analyze a lot along the way too so maybe it was worth it. ● I know people say it’s impossible to win day trading currencies but I really want to win and I think I can if I keep trying ● I know I have a passion for trading but what does it do for society? Is it worthwhile pursuing?


Cognitive dissonance can cause indecision and is the root of the psychological problems that affect good trading.

The solution to tackling cognitive dissonance is to be very clear about your personal beliefs and ethics and to realize when they are being undermined. Cognitive dissonance can easily manifest itself in self-sabotage behavior or gambling impulses so it’s important to stay on top of your psychological self.

Knowledge, mental models, and scientific experiments are the best tools to find the truth which can then be used to resolve your dissonant beliefs or behaviors.

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