#722 - Cognitive Dissonance Bias

The "Daily Call" From Option Alpha

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to be talking about the cognitive dissonance bias. And this is another favorite one of mine and just kind of dovetailing off of yesterday’s talk about the self-attribution bias, but cognitive dissonance is basically this idea that investors will potentially ignore a lot of newly acquired information or even pertinent and relevant information that they just come into contact with because it conflicts with how they previously thought the world worked or how portfolios worked or how investing or trading worked and it’s really detrimental because the problem is that sometimes you could be staring something right in your face. It’s right there in front of you. It’s researched. It’s backed. There’s data behind it. There’s a rationale and there’s a value to it and you just push it aside. You just cognitively take your hand and just move that to the side because you don’t agree with how that is now conflicting with how the world works in your mind or how you thought the world worked. I would encourage you especially today in the world of fast-moving markets and new information flying in from every direction, not necessarily to push everything aside. I would encourage you to take in information that you get and then process it and figure out if it’s actually relevant for you, not just immediately dismiss it.

Usually, when I talk to people and this even happened today where I was writing a couple of emails back and forth with people and I talk about options trading and the implied volatility edge and IVR and all these things and immediately, it’s just dismissed. It’s just put to the side like it doesn’t even exist, like it’s not been researched and it hasn’t been back-tested. There’s not a thousand different white papers on why it exists and how it’s going to exist in the future, but they just immediately push it to the side and that is a really bad mentality to have in trading. Look. To be honest with you, we made a cognitive change in how we traded our portfolio just a couple of weeks ago and we did that because new information came up that allowed us to make a new decision with how we were going to manage our portfolio moving forward. And many people who are members know that this decision was a brand-new thing that we did. We have never previously done this before, but now, we are making the conscious choice to now do it moving forward. Now, this to some degree kind of conflicted with how we thought the world would work with options trading and portfolios before and so, we had to fight back that resistance because the data and the information was so overwhelming that it caused us to make a change. It basically require that we did something a little bit different than what we were used to.

Again, don’t fall into this trap that all this new information because it conflicts with what you thought was real or what you thought the world or how the world worked, that that allows you to push this to the side. That might be just the information you need to make a dramatic shift in your portfolio. As always, hopefully this helps out. If you guys have any other questions, let me know and until next time, happy trading.