the Global Financial Crisis and the Discipline of Economics by Adam Kessler

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1 Cognitive Dissonance the Global Financial Crisis and the Discipline of Economics by Adam Kessler Psychology has become a prominent field in the modern world, with psychology knowledge being applied in so many sectors and spheres of life. Today, application of psychology knowledge in not only confined to hospitals but is also applied in businesses, education institutions, law enforcement agencies, economics, and reform institutions among many other areas. Kessler (2010) in his article Cognitive Dissonance, the Global Financial Crisis and the Discipline of Economics has applied the psychological concept of cognitive dissonance in the field of finance and economics. His application of this concept has been effective in assisting the readers to understand why leaders rationalized bad financial decisions and remain convinced of their actions. This paper will critically analyze this article by Kessler. Cognitive dissonance is a psychological concept that attempt to explain how human minds rationalize inconsistence cognition or simply how human mind justify irrational behaviors (Grohol, 2008). This theory was developed by Leon Festinger in According to Festinger, when a person experiences two cognitions which are in conflict to each other, he suffers from a state of discomfort which he refered to as cognitive dissonance. One of these cognitions is usually a personal belief and the other is usually an action or decision by an individual. In order to reduce this state of discomfort the mind attempt to reduce the inconsistency between the two cognitions. This can be achieved in three ways; (1) Changing one or both cognitions (2) reducing the significance of one or both cognitions and (3) adding a new cognition. Thus according to the theory, when persons perform actions that are contrary to their beliefs, they will tend to change their belief or the significance of their actions in order to avoid the feeling of 1 / 6

2 dissonance. In his article, Kessler (2010) expresses concerns about the response of some policy makers during the financial and economic crisis experienced in the country towards the end of the past decade. Kessler has named these economists; Believers in Laissez faire (BLF). BLF are staunch believers in capitalistic and free market economy ideals. According to Kessler (2010), it is this capitalistic ideology that plunged the country into the financial crisis. However, despite this fact being so clear among many economists, BLF still deny that the ideology they believe in are the prime cause of the crisis. Kessler argues that, the reaction by the BLF cannot be explained in any other way but through the concept of cognitive dissonance. Cognitive dissonance is making the BLF cling to their belief despite the fact that these ideals have led to the worst financial crisis since the great depression. When the BLF were asked what could have been the causes of the crises, they were quick to point fingers to other quotas so that they can remove the blame from themselves. Kessler explains that, due to cognitive dissonance old ideas, attitudes and beliefs become very hard to change. The BLF share the belief of the ethics of the market, its self adjusting mechanism and are against government intervention in matters concerning the market. According to Kessler, there are forces that undermine the tenets of this idealistic belief by the BLF. Despite clear evidence of existence of threats to this tenet, the BLF have remained adamant and would not abandon their beliefs. An inconsistence exist in the cognition of the BLF. One of them is their beliefs about the existence of a perfect, self regulating market and the second is the existence of factors that undermine the perfect market system that the BLF strongly believe in. Since the BLF are finding it difficult to let go of their beliefs, they try to align the two cognitions by reducing or totally eliminating the significance of the existence of forces that undermine the market economy. According to Kessler this behavior by the BLF does not conform to the ideals of rational decisions making. The BLF are attempting to rationalize a failing model and seem not to relent on it. Even after the great crisis, the BLF have remained stead fast to their beliefs and still oppose involvement of the government in economic issues. Kessler has outlined various decisions and policies by the BLF that he tends to think are acts of cognitive dissonance. 2 / 6

3 The concept of cognitive dissonance has been used in many areas in attempts to bring an understanding to the behaviors of human beings. Cognitive dissonance theory has changed the way psychologists and other professional think about the human cognitive ability. It has now become an important tool for economist to explain irrational, inconsistent and self defeating behaviors in the field. Kessler has technically applied the concept of cognitive dissonance to explain the irrational actions by the BLF. Kessler has clearly demonstrated the two cognitions that are in place among the BLF. One of them is their belief in the Laissez faire system and the market forces and the second cognition is the knowledge that there are factors that are undermining the proper operation of the market forces. Kessler has provided evidence of existence of these undermining forces to the free market. Kessler has mentioned the lack of ethics in the financial players who led to the bubbling and the eventual bubble burst of the housing sector. Kessler demonstrates how this was a weakness of the market economy. However, the BLF wants to hear none of these and would rather find other reasons to nail the financial crisis on. This is interpreted by Kessler as their attempt to reduce dissonance. People experiencing cognitive dissonance tend to finds various ways of avoiding the feeling. Analyzing Kesslers article, I would also support his argument that the BLF were suffering from cognitive dissonance. One important process of avoiding dissonance is selective selection (Knobloch & Meng, 2009). Selective selection is the process by which human beings of select facts, objects and people that match their beliefs and what they want to see as reality. The BLF appear to have found facts that would help convince them that their ideals were not responsible for the crisis. Kessler mentions the BLF finding an excuse in the Community Reinvestment Act (CRA). They are quick to point fingers at the CRA though not much evidence is pointing in that direction. It appears that the BLF are eager to shift the blame which in most cases is characteristic of person in discomfort. Another important concept in reducing dissonance is selective interpretation. Selective interpretation is the tendency by human beings to interpret information in a way that will bring meaning that is consistent to their beliefs (Knobloch & Meng, 2009). This is also visible among the BLF, who decided to interpret the economic crisis in a way that it would not implicate the laissez faire system. The BLF claim that the economic crisis was as result of failure by the government and not failure by the market. The effort by the BLF to exonerate the role of the free market forces in the economic crisis have been vehemently dismissed by Kessler. Kessler has provided evidence that largely implicate the market forces in the crisis experienced. 3 / 6

4 The third way to avoid dissonance is through selective exposure. Selective exposure refers to the tendency by human being to expose themselves to environments that will enforce their beliefs and to shun those environments that will bring opposition to their beliefs (Knobloch & Meng, 2009). Though Kessler has not dealt much on the reaction of the BLF in regard to exposure, their sudden phobia for public lamplight after the economic crises can be interpreted as a strategy to avoid their exposure to environments that are negative to their beliefs. People avoiding dissonance will tend to stay away from environment where people will question them about their beliefs and try to dispute them. Another principle of cognitive dissonance that Kessler has used to support his argument is the conception by Festinger that, attempting to convince a person to let go of their deeply rooted attitude will only enforce this attitude (Harmon, 2007). Kessler demonstrates this principle using the story of the woman and the cult. This woman convinced his followers that he had met aliens from another planet who convinced her that the world is going to end via flood. She convinced her followers to sell their earthly belonging and wait for the day; which they did. When the events did not take place, the follower convinced themselves that God had spared them due to their exceptional behavior. According to Kessler, the BSL appear to have become closer to their free market beliefs after the economic crisis. The attempt to convince them to drop their traditional values and beliefs has made them more attached to these values. However, one element that is central to the concept of cognitive dissonance which Kessler left out is the element of reward. When Festinger was conducting his experiment he found out that, when an element of reward is introduced it changes the attitude of the participants (Harmon, 2007). Festinger claims that, those who received payment in order to cover up their lie found it easier to rationalize their action. The greater the reward, the greater the act of rationalization and hence the lesser the dissonance. The principle of reward could have been crucial in changing the attitudes of the BSL. The BSL are major stakeholders in the economy. If the economy fails they would be the first to incur losses. There is a feeling that, if the application of cognitive theory is done comprehensively, the BSL would have had a lot of motivation to make them abandon their beliefs. If Kessler is right, BSL abandoning their belief would mean a better economy in the future and prevention of another crisis. No stakeholders stand to benefit more from this, than the BLF and therefore this should have served as the reward to push them towards abandoning their beliefs. 4 / 6

5 In conclusion, Psychology knowledge and concepts are today utilized in an array of field to bring about explanations to different human phenomena. Cognitive dissonance theory is a good example of theory that has made significant contribution to better understanding of human behaviors. Dissonance theory is a theory about seeking consistency and sense making among human beings: that is how humans try to make sense out of their surroundings, beliefs, values and behaviors (Harmon, 2007). Whenever there is an inconsistency between our attitude and behavior we tend to change something so as to eliminate the dissonance. Through cognition dissonance human being are able to rationalize irrational behavior helping them become less critical of themselves. Human minds use dissonance to impress others, protect our moral integrity and to reaffirm our self-concept. Kessler in his article Cognitive Dissonance, the Global Financial Crisis and the Discipline of Economics, has effectively applied the concept of cognitive dissonance to study the behavior of a group of economist he refers to as Believers in Laissez Faire (BLF). References Grohol J (2008). Fighting Cognitive Dissonance & the Lies We Tell Ourselves. April 11, Avaialbe at -lies-we-tell-ourselves/ Harmon E. and Harmon C. (2007). Cognitive Dissonance Theory after 50 Years of Development. Zeitschrift Socialpyschology Journal, 38 (1), 7-16 Kessler A. (2010). Cognitive Dissonance, the Global Financial Crisis and the Discipline of Economics. Real World Economics Reviews: 54. Available at econ.net/paereview/issue54/kessler54.pdf Knobloch S & Meng J (2009). Looking the Other Way: Selective Exposure to Attitude- Consistent and Counter-attitudinal Political Information. Journal of Communication Research, 36 (3), / 6

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