Don't follow an analyst unless you understand Cognitive Dissonance

The Internet has provided good platform for many analyst to broadcast there view about markets and economy. The interactive nature of the media has also many benefits and many drawbacks. If you want to follow any analyst you must understand the dynamics of the media and also the professional hazards of following an analyst. In simple language avoid the risk of cult following.

The biggest problem to watch for in analyst is what psychologist call Cognitive Dissonance. Cognitive Dissonance is a phenomenon in which an individual or a group of individual with an established opinion refuse to accept another point of view, in spite of new irrefutable evidence suggesting quiet another conclusion.

The stronger their original opinion, the more resistant they are to changing it and tend to persist in creating new argument in favor of their original views.
The other problem which further accentuate this problem is if the analyst has large followers, or recognised by media as authority or has wide access to disseminate his or her views and discredit challengers. As a result both analyst and the followers are slow to change their established opinion as that has extremely high social and psychological cost. This leads to market behaving differently from the analysts firmly held positions for extended period of time. So an analyst who publicly says Dow 5000 or Dow 100000 continues to find new reason to justify his or her call inspite of market going the other way.

The Internet by adding interactivity to the process further accentuates this process. Read comments on most widely followed bullish or bearish or value focused or growth focused analyst site or blog. You will notice any dissent is swiftly ridiculed or chased away. Then it becomes a love fest between analyst and his followers. They act to reinforce each others belief, work to discredit new data points, impute motives to others or simply say a data contrary to their belief is "spin" or " manipulated". Now this is a typical cult behaviour. Day in and day out if such things get reinforced then it becomes a very strong cult.

Very few investors/ traders have the psychological make up to avoid such cults and change their opinion and accept alternative reality or accept they are wrong and quickly seize new opportunities.

Cognitive dissonance, refers to our desire to avoid believing two conflicting things. Whereby the brain attempts to find support for the belief that carries the greater attachment or emotional involvement by finding a way to ignore or discount the conflicting belief.

In the classic study of this characteristic, researchers found that once a person had purchased a particular automobile, they would avoid advertisements for competing models and seek out those for the model purchased, so as to avoid the pain of regret that was bound to follow if they were to realize they had made the wrong decision. One way to avoid regretting the purchase decision is to (irrationally) filter the information received (or believed) after the decision has been made. Similarly, people tend to minimize the importance of subsequent information that might call their original decision into question.

The upshot is that we resort to various subconscious mechanisms to defend our existing beliefs, even where the desire to maintain these beliefs has a less-than-rational basis.

Knowing this, how do investors adjust their behaviour to compensate for the tendency to avoid or deny new, conflicting information? The answer is to seek out contrary opinions; to realize that research doesn't stop once a decision is made; to strive to identify mistakes as early as possible and take pride in the ability to do so.