The most famous example of cognitive dissonance is one of Aesop’s fables, the story of the Fox and the Grapes. In the story, a fox comes across some grapes. He tries to reach them, but is unable to. He finally gives up, rationalizing that they looked sour anyway. In the story, the fox had two contradictory ideas and actions (the desire to eat the grapes and the inability to reach them), which caused him enough stress that he had to reconcile the issue by asserting that they looked sour, despite the fact that they weren’t.
So the rational thing to do would be to keep my old phone while it still worked (and I was happy with it) and when I actually needed to get a new phone, I could. I would have the added benefit of deferring the inevitable cost of a new phone, and by holding out, I might wait long enough for something cool like the Palm Pre or the iPhone to come out on Verizon’s network.
Common justifications I use are: “It was on sale”, “I’ve been thinking about buying one for a while”, “I deserve something new and shiny”, etc… Being able to justify our actions (whether it’s a solid justification or not) alleviates that guilt and we’re free to enjoy what we’ve purchased, even if in the long term that decision is proven to be the wrong one.
They did this by surveying two groups of mutual fund investors, and found that even the most respected and well-informed investor tends to alter their perception of the past poor performance of their investments. Cognitive dissonance is all about people revising their attitudes about a certain idea in an effort to reconcile logical contradictions. When the opportunity presents itself to make those revisions, investors tends to take it, thus allowing them to feel a greater level of comfort about their decision, which in turn allows them to stick with the poorly performing fund for a longer period of time. The referenced paper is more extensive than I have presented here, and it’s definitely worth checking out if you’re interested in this subject.
The key is to recognize when we’re making a logical leap. As with every financial decision, careful planning and recognition that our emotions and psychology affect how we behave is a crucial step in ensuring that we don’t fall victim to irrational behavior that will prevent us from building wealth.