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Cognitive Dissonance For Bulls & Bears

Tyler Durden's picture




 

Excerpted from John Hussman's Weekly Market Comment,

In the 1950’s, Stanford psychologist Leon Festinger developed the theory of cognitive dissonance, describing the psychological conflict that results from holding two opposing beliefs or attitudes at the same time. When subjects were asked to convey or act on information that they knew was untrue (and were provided only weak justification for doing so), the resulting “cognitive dissonance” actually led them to change their own beliefs and attitudes to be consistent with the untrue information. It is difficult to hold opposing beliefs simultaneously. Festinger later showed that people typically respond in two ways to cognitive dissonance. Either they try to preserve their current understanding of the world by rejecting or ignoring conflicting information, or they abandon their existing beliefs to reduce the conflict.

Several years of persistent yield-seeking speculation provoked by zero-interest rate monetary policies have created a fertile ground for cognitive dissonance. On one hand, any observer with historical perspective knows not only that the overvaluation from this kind of speculation inevitably ends in tears, but also that the heavy issuance of new speculative and low-quality securities during the bubble finances and enables unproductive malinvestment that leaves the economy far worse off in the end. We should recognize that this same narrative was observed in the late-1920’s bubble-crash, in the tech bubble-crash, in the housing bubble-crash, and will be remembered painfully, but in hindsight, as the QE bubble-crash. On the other hand, prices have been advancing.

It’s difficult to entertain both of those facts at once. One must simultaneously hold in mind reckless yield-seeking speculation, hypervaluation that rivals the 1929 and 2000 equity market peaks (see Yes, This is an Equity Bubble), zero interest rates, low prospective long-term returns all around, and persistent malinvestment that poses increasing systemic risks for the entire global economy, plus one fact that encourages us to forget it all: prices have been going up. Cognitive dissonance tempts us to reconcile this tension by ignoring one part of the story or another.

For bulls, this cognitive dissonance creates the temptation to ignore the speculative risk and to dispense with valuation concerns by citing measures that have weak or zero historical relationship with actual subsequent market returns. The result is a stream of justifications for why stocks are reasonably priced and likely to advance without interruption.

 

For bears, this cognitive dissonance creates the temptation to ignore the rising prices – to plant the valuation flag, knowing that a century of evidence on reliable valuation measures supports the strong conviction that market returns over the coming decade will be dismal (most likely negative over horizons of 8 years or less), and that the likelihood of a market loss on the order of 40%, 50% or even 60% in the next few years is quite high.

Read more here...

 

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Mon, 01/05/2015 - 15:12 | 5624762 deeply indebted
deeply indebted's picture

Everything is fine. I was just reading through some stories on CNN, Business Insider, and MarketWatch. They all say that Kim Kardasian's butt is big, and I believe them! Oh, wait.. What was the question?

Mon, 01/05/2015 - 15:14 | 5624784 Dr. Engali
Dr. Engali's picture

"What was the question"?

 

 

 

How many licks does it take to get to the tootsie roll center of a Tootsie pop? ... Or something like that.

Mon, 01/05/2015 - 15:22 | 5624829 NotApplicable
NotApplicable's picture

"Cognitive Dissonance????

Shaddup and eat yer blue pills!"

Mon, 01/05/2015 - 15:41 | 5624911 Cognitive Dissonance
Cognitive Dissonance's picture

"It’s difficult to entertain both of those facts at once."

Try harder. I'm sure if you put your mind to it you will suceed.

/s

Tue, 01/06/2015 - 08:01 | 5627186 StandardDeviant
Mon, 01/05/2015 - 15:28 | 5624843 KnuckleDragger-X
KnuckleDragger-X's picture

Everything is going well, unless its not and I will do fine unless I don't, now hand me the crack pipe and call the hookers.....

Mon, 01/05/2015 - 15:09 | 5624763 RaceToTheBottom
RaceToTheBottom's picture

All cognitive abilities have gone...

Mon, 01/05/2015 - 15:09 | 5624764 NOZZLE
NOZZLE's picture

How to tell when DOW is down significantly, every 1/2 hour news on radio fails to trumpet "DOW is down . . .  points", in fact when it is down, they never even mention it so as not to kill Animal Spirits of morons.

Mon, 01/05/2015 - 15:25 | 5624838 i_call_you_my_base
i_call_you_my_base's picture

And if they do mention it, they use "off" not "down".

Mon, 01/05/2015 - 15:11 | 5624774 Dr. Engali
Dr. Engali's picture

At least we have Bill Clinton's sex life to distract us again:

 

Bill Clinton identified in lawsuit against his former friend and pedophile Jeffrey Epstein who had 'regular' orgies at his Caribbean compound that the former president visited multiple times

 

http://www.dailymail.co.uk/news/article-2584309/Bill-Clinton-identified-...

Mon, 01/05/2015 - 15:19 | 5624811 Philo Beddoe
Philo Beddoe's picture

Roman Polansky says the guy did nothing wrong. I am confused. 

Mon, 01/05/2015 - 15:28 | 5624851 KnuckleDragger-X
KnuckleDragger-X's picture

Or as Whoopi Goldberg explained "its not rape rape"....

Mon, 01/05/2015 - 22:00 | 5626304 malek
malek's picture

Did she mean it's more Assange "rape"?

Mon, 01/05/2015 - 15:19 | 5624813 insanelysane
insanelysane's picture

The real interesting thing with this story is that the main perp reached a plea deal for 2 minor charges and everyone else who ever knew the perp was given blanket immunity.  The wording was something like "immunity is granted to all associates of said perp, including to but not limited to, and then 5 names follow.

Mon, 01/05/2015 - 15:24 | 5624836 fuu
fuu's picture

For me the question is where do they get these gals to trade around the mega yacht? JD#3 isn't that hot yet billionaires, royals, and moguls were jostling for position to nail her? Does she have the magic gold spinning pussy?!?

Mon, 01/05/2015 - 15:28 | 5624850 Bill of Rights
Bill of Rights's picture

" I did not have sexual intercourse with Jeffrey Epstein "

Mon, 01/05/2015 - 15:57 | 5624993 SeattleBruce
SeattleBruce's picture

I did not have sexual intercourse on that compound filled with drugged, underage sex slaves.

Mon, 01/05/2015 - 16:40 | 5625178 RushRoolz
RushRoolz's picture

Didn't Teddy-boy Kennedy have some sort of daliance with a hoe at some compound. I vaguely remember some story. I'm thinking Bill and Ted had an excellent adventure together? Amazing how the NOW crowd can look the other way with those two winos, all in the name of ideology...

 

Mon, 01/05/2015 - 15:14 | 5624785 Scoobywan
Scoobywan's picture

Third option...

Joshua (WOPR) said it best....

"A strange game. The only winning move is not to play"

Mon, 01/05/2015 - 15:27 | 5624839 madbraz
madbraz's picture

Something strange

in your CME oil future bets

who you gonna call

NY FED busters

 

a multi, multi billion dollar loss

sleeping in your delta hedge

who'll help you avoid the margin call?

NY FED busters

 

$162 billion in reverse repos by the NY FED today.  Happy New Year, Krugman.

Mon, 01/05/2015 - 15:41 | 5624883 fuu
fuu's picture

$200 billion came due today from December. 

 

12/29 Sub:  $76.085B Acc: $76.085B @ .10% maturity 1/5/15

12/22 Sub:  $49.500B Acc: $49.500B @ .10% maturity 1/5/15

12/15 Sub:  $75.100B Acc: $50.000B @ .07% maturity 1/5/15

12/08 Sub: $101.934B Acc: $50.000B @ .08% maturity 1/5/15

 

 

Mon, 01/05/2015 - 15:46 | 5624927 madbraz
madbraz's picture

yep, and needs to be rolled over immediately.  "temporary" repos my a$$

Mon, 01/05/2015 - 15:39 | 5624900 Ewtman
Ewtman's picture

The herding impulse is strong when independent reasoning becomes difficult. Cognitive dissonance is evidence of safety in numbers mentality...

 

http://www.globaldeflationnews.com/recognizing-changing-social-mood-is-k...

Mon, 01/05/2015 - 15:49 | 5624949 seek
seek's picture

You know, high-reliability mission critical systems usually default to a "safe mode" when they get conflicting inputs so as to not damage anything and save the mission they're on.

I do the same thing. Been in safe mode since 2008. I'm not sure why the rest of the herd goes into ignore risk mode, but that's their cross to bear when the mean reversion hits.

Mon, 01/05/2015 - 15:57 | 5624987 buzzsaw99
buzzsaw99's picture

it really is quite simple. go long, get hookers and blow. go short, get a taser to the scrotum.

Mon, 01/05/2015 - 16:04 | 5625017 ChanceIs
ChanceIs's picture

"The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function."

F. Scott Fitzgerald

Anybody seen any first rate intelligence in Congress since about....oh....say 1994 - Contract with America?  I sure haven't seen any.  If Boehner gets to be speaker again, we will know for sure that Elvis has left the building.

Mon, 01/05/2015 - 21:23 | 5626184 Wild Theories
Wild Theories's picture

that quote was also the first thing that came to my mind as I read

don't rate myself that highly, but I see nothing wrong with accepting the rigged market can both go on(for now) and still collapse(eventually), the bitch is all in the timing...

Mon, 01/05/2015 - 16:11 | 5625058 carbonmutant
carbonmutant's picture

“An artist is a bloke who can hold two fundamentally opposing views and still function:”
? John le Carré, Tinker, Tailor, Soldier, Spy

Mon, 01/05/2015 - 16:17 | 5625084 EndOfDayExit
EndOfDayExit's picture

I finally went and checked out Hussman's annual fund reports for any indication of redemptions... Unless I am somehow reading it wrong, it is simply brutal - AUM dropped from 5.6B to 1.1B!

2011 - 5.6B

2012 - 4.9B

2013 - 2B

2014 - 1.1B

I still greatly enjoy his weekly comments though.

 

Mon, 01/05/2015 - 16:43 | 5625095 windcatcher
windcatcher's picture

My favorite example of “Cognitive Dissonance” is the fundamentals of "Free Market Capitalism" that Adam Smith and the colonial leaders decided on to address the dominance of the bankster British Empire of corporate monopoly economy. The economic battle today over main street individual business and corporate monopoly is the same as it was with our founding fathers.

As George Orwell pointed out about corporate monopoly totalitarian fascist, “First they steal your words and then they steal their meaning”.

Free Market Capitalism (FREE from corporate monopoly) as defined by Adam Smith, is dead.

As soon as a person realizes, as a reflective thinking individual, that covert brainwashing to control you and your thinking is going on; the trance of brainwashing is broken. It is the bankster fascist (merger of monopoly corporations with government) criminals that are doing the brainwashing via controlled mass media, controlled discussion and education.

The terms “Free Market” and “Free Enterprise” are both defined by Macmillan thesaurus and Wikipedia as “an economic system in which businesses can compete with each other without being controlled by government”; therein, lays the corporate monopoly brainwash.

Another corporate monopoly brainwash is the term “Capitalism”: defined as “an economic system in which property, businesses, and industry are owned by individual people and not by the government”. Again, the brainwash does not mention that capitalism is FREE from corporate monopoly in a competitive market environment which requires government regulation. Also not mentioned is that the Robert’s Supreme Court ruled that “corporations” are “individuals”.

Glass-Steagall and anti-monopoly government regulations were necessary after the Great Depression to restart the economy because the criminal banksters were out of control with greed and speculation that crashed the economy.

The American Free Enterprise System of capitalism economy, which the American middle class was built on, does not even exist in reference sites like Wikipedia, Macmillan thesaurus and other standardized research sites; it’s as if the American economic history from the Great Depression to 1990 has been rewritten; another Orwellian totalitarian tactic that is real.

The beauty of brainwashing is that intelligent people, that should know better, are led by group conditioning beginning in grade school to believe a false paradigm.

Mon, 01/05/2015 - 17:59 | 5625477 falak pema
falak pema's picture

Free Market Capitalism (FREE from corporate monopoly) as defined by Adam Smith, is dead. 

That dream died as soon as it was born; by that I mean the Oligarchs took hold of it from day 1.

Adam S was a man born in Enlightenment. When the Capitalist age began; after Waterloo; aka 1815; the money line and nascent Imperial Britain started to build their colonies based on gun boat diplomacy as monopoly masters of the sea and monopoly capitalists : cotton and salt and spices and...opium to conquer Cathay. 

There you have it; the birth of modern, financialy leveraged capitalism.

The US was not far behind, thanks to Napoleon's gift to ally Jefferson : (the huge Louisiana swathe all the way to Idaho (Mississippi/Missouri trail), for a song.  Continental USA was born and Rockafella and Morgan did the rest; Always in monopoly mode. 

We forgot Adam Smith at battle of Wounded knee ! Grant and the Indian Wars made USA relentless as monopolists, coast to coast.

The only time the USA became a regulated market system was after BW and Keynes's contribution to a welfare state; the golden age of Ike;  something we forgot after Aldous Huxley day.

It was back to Oligarchy rule with a vengeance, as hubristic America had forgotten the age of "the grapes of wrath"... now looming ominous once again today.

Mon, 01/05/2015 - 18:58 | 5625685 windcatcher
windcatcher's picture

In reply to Falax: You make a good example of cognitive dissonance; your Libertarian rant ignores the question and facts. Free Market, you can’t even define it, let alone come to grips with it. Ha. Ha. Ha.

You must shudder to think that the criminal banksters and monopoly fascist should be regulated for their own good and for the good of everyone else. Funny how you just ignored FDR, in your snake bit mind, he was the father to a welfare state and the middle class never existed. Ha. Ha. Ha. Don’t worry, you are not alone, we have a whole nation that are brainwashed stupid and do not know what to do. There isn’t a economic crash coming, now is there? Ha. Ha. Ha..

 By the way Smith coined the word Free Market Capitalist. The British corporate monopoly was Imperial fascist.

Mon, 01/05/2015 - 16:55 | 5625241 undilutedopinion
undilutedopinion's picture

Dude, where is my pension fund?

Dude, where is my car?

Dude, like did you own it ?

Dude , where's my car?

Dude, I like seen this old chick yellin eat it motherkuckers, and she was drivin' your car.

Dude , like no way

Dude, did she say like anything obout my pension?

Dude, ???!!!???

Mon, 01/05/2015 - 17:16 | 5625337 Clowns on Acid
Clowns on Acid's picture

We had to Cog Diss some folks ....

Mon, 01/05/2015 - 18:54 | 5625663 farmboy
farmboy's picture

Interesting piece. Perhaps the solution is for a money manager to rent this market by purchasing a call instead of owning it. Just to protect yourself IMHO.

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