The Risk of Cognitive Dissonance in Investing

Jan 14, 2014 / Priyanka Chakrabarty | 38 Downloaded |  6244 Viewed | | | 3.0 |  10 votes | Rate this Article
Financial Planning article in Advisorkhoj - The Risk of Cognitive Dissonance in Investing
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The thought of risk is not something we all want to risk. Security is what our lives should be aimed at. As secure job, secure life, secure investments. So when you hear your friend getting great returns on a Mutual Fund scheme you console yourself by saying that your money is safe in a fixed deposit scheme even though you are getting extremely conservative returns. You took up a government job thinking you will get the security of pension during your old age. While everyone around seems to be getting jobs in the corporate earning double of what you may earn. Yet you console yourself by believing that your future is secure.

Do you realize that you have been using cognitive dissonance all this while? You are constantly consoling yourself with ideas of security, the moment your identity as an individual is brought to question. The moment we expose ourselves to the smallest of risk we rush to embrace security. What is this pressing need to make ourselves believe that everything is fine? You get a good night’s sleep when you have security. Or do you? Don’t you ever feel the need to get up and do something which puts you in a different light from all the others? And doesn’t this idea make you toss and turn at night despite the “secure surroundings” that you have created?

One of the biggest risk taking arenas, which is feared by most Indians is the less travelled path of entrepreneurship. It is one of the biggest risks that an individual has to undergo if they want to fulfil their dreams of being professionally independent. Entrepreneurship could also be read as a means of giving up of all believes in the conventional ideas of security. One of the biggest risks involved is the lack of liquid or cash flow in an entrepreneurial venture, soon after its inception. A venture takes time to be established which could vary from two to ten years or even more. Speaking in economic terms, when a business starts the expenses are more than profits. Hence what is incurred is termed as loss. It is extremely crucial that a business reaches a “break-even point”. It is that point where the expenses incurred is equal to the profit earned. Hence, it becomes a no profit, no loss scenario. From this point onwards, a business starts to incur a profit that is income generated exceeds the expenses incurred.

They are a few brave hearts who have ventured in to the field of entrepreneurship and have achieved considerable success. They received success because they had a high appetite for risk and were willing to give up their constricted notions of security. We do not mean to imply that we should not aim at a secure life. What we merely want to convey to our readers is the fact that without risk one cannot expect high returns. A high return is a factor that every individual’s hard earned money deserves.

Investors are often unwilling to take risk in their investments as well. Conservative investments can never take us too far in terms of returns. So that you as an investor can get the highest return that your money deserves, is precisely the reason why financial advisors in the country have taken up the profession. There have been certain unfortunate cases where investors tend to lose heavily due to the stock market crashes or hasty investments or investments through an unqualified or inexperienced advisor. But we have to remember that there is a very fine line between taking calculated risk and being careless. As an investor you are suppose to invest in a balanced portfolio which will be advised to you by your financial advisor who is qualified to do so. In that balanced portfolio do not hesitate to take the risk and it means that you will reap in future.

It is time that we challenge the conventional ways of thinking and the ideas that have shaped us because as we all can feel that it is the time for change. Change begins at home and change begins with us. So let us step out of our comfort zones and take risks which have the potential to change our lives positively. The phenomenon of cognitive dissonance is crippling. It is nothing but a mechanism of self defence to protect our ego from the harsh glare of reality. Clinging to the security of cognitive dissonance will give us a secure life with pension for old age. But recognizing our true potential will enable to become the individuals we never thought we were capable of becoming.

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