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דיסוננס קוגניטיבי הוא סוג של דחף אנושי הנובע מאי-הנוחות הפסיכולוגית להחזיק בשתי תפיסות הכרתיות מנוגדות (דעות, אמונות, רגשות וכדומה). שתי דעות נמצאות בדיסוננס האחת כלפי השניה אם הן לא מתאימות אחת לשניה באופן כלשהו (לדוגמא סותרות האחת את השניה).

כאשר מתפתח דיסוננס קוגנטיבי, אדם ינסה להתמודד איתו בשלוש דרכים:
(1) האדם ינסה לשנות אחת מהדעות, האמונות או ההתנהגויות שבלב הדיסוננס;
(2) האדם ינסה להשיג מידע חדש או חיזוק אמונתי חדש שיגביר את הקוסוננס ויקטין את הדיסוננס;
(3) האדם ינסה לשכוח או להפחית מחשיבות התפיסות הדיסוננטיביות.
אנשים שונים מתמודדים עם אי-נעימות פסיכולוגית בדרכים שונות.

דוגמא אחת למצב בו מתפתח בדרך-כלל דיסוננס היא כאשר המציאות עומדת בסתירה לתקווה הראשונית להצלחת הפוזיציה, כאשר המצב העובדתי המתפתח מתנגש עם ההנחות הראשוניות לפיהן בוצעה כניסה לפוזיציה. כולם רוצים להצליח במסחר, אבל לעיתים קרובות החלום להצליח מפריע להכרה במציאות כאשר פוזיציה מסוימת מתחילה לסתור את הנימוקים שעמדו בבסיס הכניסה לאותה פוזיציה. המוח האנושי נוטה להתמקד בחדשות הטובות ולהתעלם מהחדשות הרעות ולכן, במקרה של התדרדרות הפוזיציה וחריגה מהנחות הבסיס, המוח מתחיל לחפש נתונים ואינדיקטורים אחרים שעדיין תומכים בפוזיציה המתדרדרת, או לחילופין כאלו שיגרמו לשינוי אותן הנחות ראשוניות. אחת מהתופעות המזיקות ביותר היא התקווה למהפך של פוזיציה מתדרדרת. במקום להכיר בטעות מוקדם ולחתוך הפסד קטן, נכנסת התקווה. תקווה היא למעשה הגנה שיוצר האגו - קשה לאגו להודות שהכניסה לפוזיציה היתה מוטעית, קשה לאגו להודות בטעות כלשהי. האגו מעדיף להמשיך ולתמוך בתדמית העצמית שמשקפת הצלחה ולא כשלון. סוחרים רבים מפסידים הון במהלך הניסיון להגן על תפיסת המציאות של האגו שלהם, במקום להכיר במציאות האמיתית ולהודות בטעות מוקדם ככל שאפשר.

[Festinger] Dissonance arouses tension and motivates individuals to seek ways of reducing the dissonance. The greater the magnitude of the existing dissonance, the greater is the motivation. The more important the cognitions are, the greater the magnitude of the dissonance. The greater the ration of dissonant to consonant cognitions already present, the greater is the magnitude of added dissonance. Some means for reducing dissonance include: behavioral change, addition to evidence justifying one's decision, changing one's attitude about one's act, and distorting the information
[Mayes] Related to fear of regret, this psychological characteristic is the desire to avoid cognitive dissonance, or believing in two conflicting things. If emotional involvement or attachment supports one of the beliefs, the brain will attempt to avoid or discount a conflicting belief and seek out support for the preferred belief. How can we adjust for the natural tendency to avoid or deny new, conflicting information? As in most situations, discipline can help. We can write down the reasons for our decisions and re-evaluate their validity as dispassionately as possible when faced with new information.
Cognitive dissonance is the mental conflict that people experience when they are presented with evidence that their beliefs or assumptions are wrong. The human brain is reluctant to receive information it knows will cause anxiety or pain. Investors with losses often act like ostriches confronted with danger. After a decision, information in favor of this decision is more likely to be perceived than information which questions the decision. Correction of wrong decisions are delayed.
I'll See It When I Believe It - A Simple Model of Cognitive Consistency, Yariv, 2002
"Consider someone who buys an expensive car and later discovers that it is uncomfortable on long drives. Disagreement, or dissonance, exists between their beliefs that they have bought a good car and that a good car should be comfortable. Dissonance could be reduced by deciding this discomfort does not matter since the car is mainly used for short trips (decreasing the importance of the dissonant evidence) or focusing on the car's strengths such as safety, appearance, and handling (thereby adding more consonant evidence). The dissonance could also be eliminated by getting rid of the car, but this behavior is a lot harder than changing beliefs. Moreover, if ambiguous information about the car arrives (a friend comments "this looks like a really interesting car"), it is more likely to be interpreted as supporting the belief that the car is good ("the friend means the car looks really cool and unique") rather than countering it ("what is an interesting looking car? The friend must mean it looks like a real lemon. Maybe the fact it's uncomfortable on long drives shows."). This example illustrates two cognitive biases that are consistently observed in agents making decisions under uncertainty: cognitive dissonance and confirmatory bias. Cognitive dissonance states that after having taken an action people tend to change their beliefs about the relative agreeableness of this action. Confirmatory bias refers to the phenomenon of people interpreting new evidence in ways that confirm their current beliefs. The abundant psychological literature on these two biases (overviewed in Section II) indicates that people behave as if they have a taste for: 1. consistency between the action taken and the belief held at each point in the decision process and 2. consistency between beliefs in di₪erent stages of the decision process".
An Overview of Behavioral Finance
Cognitive Dissonance Theory: A conflict arises after nearly all decisions involving a choice between alternatives. This is because the chosen alternative often has negative aspects, and the rejected alternative also has positive characteristics. The characteristics contradict the opinion of the decision maker, who is convinced she has made the best possible choice. Such a contradiction is known as “cognitive dissonance”. A particular commitment is prerequisite for the creation of dissonance. Commitment occurs when we have an emotional attachment to a decision. Most people try to avoid dissonant situations, and they will try to even ignore information that might increase their discomfort.
There are two ways of achieving that:
SELECTIVE PERCEPTION: people observe mainly information, which favors of the decision made. Thus, information is distorted to meet a need and this might give rise to wrong further decisions.
SELECTIVE DECISION MAKING: people act in such a way that their initial decision, probably accompanied by high commitment, leads to the desired result, even if they must pay a high price for this. They will continue to invest in a project, hoping that the investment so far has not been for nothing.
How people try to avoid dissonance...
People endeavor not to make wrong decisions in order to avoid regret and disappointment. The results of a wrong decision are perceived as more negative than the damage that might be incurred through doing nothing. This leads people to be passive rather than active, insofar as they are confronted with decision-making situations under certain conditions, and to rely on the old ways instead. People usually experince loss aversion, that is they feel losses much more deeply than gains of the same value.
The need to control
Every person has the need to perceive himself as the originator of changes in her environment. This gives rise to feelings of competence and a sense of one’s own value. There are several forms of control pertinent to Behavioral Finance Theory:
CONTROL THROUGH PREDICTION: predictions invoke the sense of being able to control the market. Analysts believe that the more logically predictions have been compiled, the more probable that they will come true.
CONTROL THROUGH AWARENESS OF THE INFLUENCE FACTOR: a decision maker considers a situation more controllable when she feels that she is fully informed and competent. Such situations, characterized by full information and clearly indicated and reliable probability, are not typical for the financial smarkets.
Factors of control
The investors who review their performances only after long intervals perceive the smallest control deficit. Investors, who check daily whether their shares have gained or lost, will perceive the risks as much larger and will realize that they are at the mercy of the markets. The investors who follow price movements act much more risk-averse and on the whole achieve worse results.
Consequences of the need to control
People tend to have too great confidence in their own ability.This is a source of error which distorts perception. The greater the confidence peopel have in themselves, the more risk there is of overconfidence.
+ If people succeed, they believe this to be due solely to personal skills; if something goes wrong, then others, or adverse circumstances, are to blame.
+ Many people tend to overestimate what they knew or suspected about the outcome of an event before it took place. This is called “hindsight bias”. Nobody knows exactly whether a price will rise or fall. However, many people seem to remember that they had a feeling that it would be so.
+ After a loss of control people either call a well-known analyst or seek out a group of people with similar opinion, e.g. investment club. Comparing opinions in the group creates an illusion of validity.