Essay: Cognitive Dissonance and Behavioral Finance

Sample Essay

Introduction

The cognitive dissonance theory explains the phenomenon where a person experiences tension and anxiety when that person has two opposing thoughts in mind. Dissonance is directly proportional to the importance of a certain ideology, intensity of opposing views and absence of rational decision making.  When a person believes something quite strongly and acquires knowledge which is in contradiction with this belief the person feels tensed in making a choice between the two cognitions.

Cognitive dissonance is the discomfort or tension a person feels after acting against the personal belief system. When a person faces two differing ideologies and is forced to make a decision to choose one of these ideologies the person may change the current personal belief system or behavior, justify the current behavior by changing the newly acquired opposing cognition or justify current behavior by acquiring additional cognitions. The level of cognitive dissonance is strongest when self image of a person is involved. If a person performs an action which cannot be reverted then that person tries to change his/her beliefs in order to adapt to the differences created by the performed action. When dissonance starts a person needs to reduce it depending on the level of differences between the two cognitions. It is generally difficult to change a cognition which relates to a person’s behavior.

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