There are many pitfalls when investing, or even when trying to successfully manage your personal finances for that matter. For a lot of people this can be chalked up to never learning important financial concepts, however we are also led astray by our own brains and behaviors!
Cognitive dissonance and confirmation bias can negatively impact our finances, especially if we aren’t aware of them. Cognitive dissonance is the discomfort associated with new information we receive that may lead us to question our beliefs.
You are really excited about a new company, you purchase stock believing it will increase in value. A couple weeks later a headline appears that the company actually created a product that will be more detrimental to the health of its users than smoking, yet not addictive. You are so excited about the company you just ignore the headline and hold on to your stock.
This discomfort from cognitive dissonance leads to confirmation bias; that is ignoring all other perspectives other than those that agree with your beliefs.
Now that this bad headline was published you only focus on reading news stories tweeted out from the company’s Twitter account that discuss how the headline was wrong and the company’s studies show their product is perfectly safe. A month later the company files for bankruptcy and the stock is worth zero.
When the facts change you have to be willing to change your mind.