Black Box Thinking: Growth Mindset and the Secrets of High Performance

by Matthew Syed

But this perspective does not encompass the full influence of cognitive dissonance. The problem is not just the external incentive structure, it is the internal one. It is the sheer difficulty that we have in admitting our mistakes even when we are incentivised to do so. To see this most clearly, consider the so-called disposition effect, a well-studied phenomenon in the field of behavioural finance. Say you have a portfolio of shares, some of which have lost money, and some of which have gained. Which are you likely to sell? And which are you likely to keep? A rational person should keep those shares most likely to appreciate in the future while selling those likely to depreciate. Indeed, this is what you must do if you are attempting to maximise your financial return. The stock market rewards those who buy low and sell high. But we are actually more likely to keep the shares that have lost money, regardless of their future prospects. Why? Because we hate to crystallise a loss. The moment a losing stock is sold, a paper loss becomes a real loss. It is unambiguous evidence that the decision to buy that stock in the first place was a mistake. This is why people hold on to losing stocks far too long, desperately hoping they will rebound.