Cognitive Dissonance and the Markets Today

Thoughts on the Market

September 14, 2025

Cognitive dissonance occurs when individuals hold two or more conflicting beliefs, values, or attitudes and is especially perplexing when their actions contradict their understanding. In investing, this often manifests as the refusal to adjust portfolios or outlooks, even when evidence suggests they should.  In fact, people will twist and contort their thinking in bizarre ways to justify their investment decisions, ignoring the obvious flaws in their logical construct.  I have often noted that people are incredibly neurotic about two things:  sex and money.  Lately, I have become convinced that they are more neurotic about the latter than the former.

In the current environment, many investors believe the market is overvalued but continue buying stocks for fear of missing out.  This group is at least aware of the risks of the current market price levels.  We also have many investors  who are demonstrating a level of cognitive dissonance I have rarely seen.   These investors bought tremendous amounts of stocks on the optimism of a resilient economy and a strong labor market.  Over recent days and weeks, as the employment numbers have gotten  revised sharply lower, they didn’t skip a beat.  Instead of taking a moment to assess the macro implications of hundreds of thousands of  fewer jobs than first reported, they immediately switched their narrative to:  “Since the Fed must promote maximum employment, they will certainly cut rates, so we need to buy more stock.”  Wow!  Actually, the worse the employment numbers got, the more bullish these “investors” became.  What an amazing thing to watch – they bought stocks on apparent job growth, and they bought even more stock when they discovered the same jobs never existed.