Why is it so hard for some of us to admit we’re wrong? Then when we make a mistake, we double down rather than admit fault?
Psychologists call this cognitive dissonance – the stress we experience when we hold two contradictory thoughts, beliefs, opinions, or attitudes. For example, a husband gets called out by his wife for staring at a beautiful woman walking down the sidewalk. When he denies it to his wife, he experiences dissonance.
People cope with this dissonance in two ways. Some will apologize to their wives and accept fault. Unfortunately, most people will double down and insist that they never looked at the other woman.
Why do people double down when they know they’re wrong? Because they would rather double down than take a hit to their self-esteem by admitting fault. Dissonance makes people feel uncomfortable and for a lot of people pivoting and admitting fault only adds to that discomfort.
For most people, doubling down actually makes them feel good – if only for a short time. Research has found that people experience a short-term increase in their feelings of personal power and control after refusing to apologize.
So given the choice between making themselves feel good by doubling down vs. admitting fault and making their wives feel good; unfortunately, most will choose the former. You can understand now the high divorce rate.
The problem with doubling down is when we refuse to admit our mistakes, we are also less open to constructive criticism, which can help hone skills, rectify bad habits, and improve ourselves overall. But there’s hope.
Another study, by Stanford researchers Carol Dweck and Karina Schumann, found that subjects were more likely to take responsibility for their mistakes when they believed they had the power to change their behavior. If a person has confidence in a more productive alternative path, they’re more likely to admit fault in order to take that path and grow from their mistakes.
In the field of behavioral finance (there is such a thing), cognitive dissonance is manifested in several investment biases that prevent investors from accepting that a certain investment or investment strategy is bad and from pivoting and moving onto something more profitable or viable.
Instead of acknowledging they’re investment or investment strategy is a loser, they’ll double down for the same reason a husband won’t admit fault to his wife… to preserve self-esteem.
Here are some of the behavioral finance biases that prevent investors from admitting they’re wrong, pivoting, and moving onto something more productive:
LOSS AVERSION. This financial behavioral bias most closely resembles the concept of doubling down. Loss aversion is the feeling of wanting to avoid a loss and doing all we can to reduce the chance of it happening. The evidence suggests that we feel losses at least two to three times as strong as we feel an equivalent gain.
In other words, the risk of the pain of losing far exceeds the potential payoff. This bias drives us to actions to avoid losses rather than those that will result in gains. We’ll take the road to avoid the cliff rather than take the road that will lead us to the treasure.
Loss aversion is the same reason we double down in arguments. The negative emotions from admitting we’re wrong are three times as intense as the potential positive emotions we might experience from apologizing. The pain of loss far exceeds the potential gain so we’ll double down.
ENDOWMENT EFFECT. Placing more value on something we own than something we don’t own. This bias means that we often hold on to investments long after they’ve become irrelevant to our goals and long after an alternative investment would better serve our long-term purposes and goals.
Think of the person that holds onto a dilapidated car beyond it’s safe, useful life. It may be a piece of junk, but it’s theirs. They bought it and can’t think of letting it go. The problem is that this junker of a car keeps breaking down and the owner keeps throwing money at it and keeps losing days at work from it breaking down when he could stop all this financial bleeding by getting rid of the clunker for a more reliable car.
The same goes for bad investments. Some investors feel so much attachment to their investment choices, that they’d rather keep losing money than to let go and invest in something more reliable.
DISPOSITION EFFECT. This is where we tend to hold on to losing investments for too long while selling winning investments too quickly. This is closely linked to loss aversion. Like the husband who clings to his side of the argument for too long – damaging his relationship further and further – the investor who holds on to losing investments too long damages his portfolio more than he ever should have.
There’s hope for those who are inclined to double down. Aren’t you sick of sticking to an investment or investment strategy that continually disappoints? Nobody is saying it’s easy to pivot, but there’s hope.
Research in the field of cognitive dissonance has found that if a person is confident in the positive results of an alternative path, they’re more willing to admit they’ve been wrong by clinging to bad investments and pivot for that better alternative path. Sometimes they just need the knowledge to see and follow the light.
For investors looking for a brighter alternative path, follow the smart money.
Find out why institutional and ultra-high-net-worth individual investors have never been disappointed by cash flowing alternative assets that are insulated from Wall Street volatility and from recessions. What do you have to lose?
When pivoting provides a more productive choice than doubling down, maybe it’s time to pivot.