August 5, 2025: Check Your Bias
In investing and in life, we like to consider ourselves as rational actors: processing information objectively, weighing risks and rewards, and making sound decisions grounded in fact. Behavioral finance, on the other hand, reminds us that more often than not, we’re just human. And when new information challenges what we already believe to be true, the result isn’t necessarily a clearer picture; in fact, it can be downright discomforting. That tension between belief and reality has a name: cognitive dissonance.
Source: moresapien.org
The theory was first introduced by social psychologist Leon Festinger in the 1950s and posits that cognitive dissonance occurs when an individual holds two conflicting beliefs or is confronted with information that contradicts an existing belief. In investing, this surprisingly shows up more often than we realize. Consider an example of a growth investor who believes a company has a durable competitive advantage but then sees the share price fall off a cliff on a very weak quarterly earnings report. Rather than reassess the investment thesis, the investor may seek out confirming narratives, dismiss the data as noise, or double down on the position in an effort to “stay consistent.” Sound familiar? This is what behavioral finance classifies as a belief perseverance bias, a subclass of cognitive errors that causes investors to cling to prior views even in the face of contradictory and/or new information. Importantly, these errors are not rooted in emotion or impulse (like overconfidence or loss aversion), but rather in flawed reasoning. That distinction matters massively, because cognitive errors – unlike emotional biases – are generally more correctable. With awareness, discipline, and structured decision-making, their influence can often be moderated or avoided entirely.
Why does cognitive dissonance matter to us as your portfolio manager or as individual investors? It can cloud judgment, leading to missed opportunities, delayed exits, or persistent overweights in names that no longer merit conviction. More broadly, it contributes to broader market inefficiencies, particularly during inflection points when new information should be most impactful. What’s the fix? While there is no silver bullet, there are guardrails. Maintaining adherence to a written investment thesis that includes specific reasons to exit a position, not just to enter. Cultivating devil’s advocate thinking when evaluating new data or information. And perhaps most importantly, separating ego from process. Being wrong on a stock doesn’t make you a bad investor, but staying wrong despite new evidence very well might. In closing: markets evolve over time, and so must we. The willingness to check our egos and update views in the face of new evidence isn’t a sign of weakness – it’s at the very core of rational investing. Recognizing when dissonance creeps in is step one. Having the discipline and courage to address this can often yield where the real alpha lies…in both investing and in life.
