Killer Biases: How 'Cognitive Dissonance' Devastates Trading & Investment Performance.

Cognitive Dissonance is a Human Behavioural Bias which can distort our thinking and perception in ways which can be highly detrimental to the performance of individuals and groups. This article highlights how this can have serious impacts on the performance of traders and investment professionals. However the lessons from this are applicable well beyond the world of finance.

Dennis Gartman states that ‘Capital comes in two varieties, mental and that which is in your pocket, and that of the two 'mental' is the most important and most expensive’. Mental capital is so difficult to control and manage because our minds do not work in the way we like to think they do. In a perfect scenario, they would work to make rational and sound decisions, with pros and cons perfectly weighed up, and outcomes considered objectively. However, reality is very different: Markets are volatile and uncertain, which restricts our ability to act rationally, and our minds are easily swayed by factors which heavily influence the way we think, decide and act. The field of behavioural finance looks to provide greater understanding of how these factors impact our decision making, affects our actions, and shapes our behaviours. A major area of interest for Behavioural Finance is human biases, one of the most impactful of these biases is 'Cognitive Dissonance', a term which is best summed up as how we cope when faced with 'Inconvenient truths'.

People will go to great lengths to avoid admitting an inconvenient truth.

As humans we seek rational explanations based on reason. We seek clarity, certainty, and logical solutions to difficult problems. This mindset is extremely challenged however in financial markets. Whilst there is an order to financial markets, this order is typically only discernible retrospectively. Financial markets are an example of a 'complex system': Complex systems are characterized by high uncertainty, volatility and non-constant variables. In a complex system, cause and effect are only clear with the benefit of hindsight. Contrast this to a 'complicated' system which is more static, and where sensing and analysis makes it possible to discern and find definitive solutions, often with application of scientific principles. Most people have been conditioned to work in 'complicated system', we have been primed this way by our education system and culture. However, the approach for a ‘complicated system', often falls short when faced with the uncertainty of financial markets. The diagram below emphasises this point:



It is within this 'complex' world of trading and investment, where people are seeking certainty and logical solutions, that mental biases can easily distort thinking and perceptions. 'Cognitive Dissonance’ is one of the most pernicious of these biases, and can have deadly consequences for performance in ways which impact short-term thinking and long-term behaviour.

Cognitive Dissonance occurs when we find ourselves compromised by an 'inconvenient truth'. I.e. The market maybe going lower, but we continue to believe in a bullish case long after the bullish case was proved wrong. Sharing opposing beliefs at the same time is mentally troubling and make us feel extremely uncomfortable. When faced with these opposing beliefs in our mind, we may create far-reaching justifications and rationalisations in order to avoid the discomfort connected to ‘Cognitive Dissonance’. Typically, we come down on the side of our initial or invested belief, only changing sides, if at all, when there is overwhelming evidence against us. Think of the classic trading mistake of refusing to cut-out a short-term trade, which then becomes a long-term trade. You didn’t start with a strong long-term conviction, but the short-term trade went horribly wrong and you decided to hold it. You are now faced with two opposing beliefs:

Belief 1) No convincing long-term view.

Belief 2) By running this short-term position as a long-term position it should make money.

Action taken to resolve this dissonance: The right thing would have been to cut the short position and take a loss. But your 'loss aversion’ bias has caused you to avoid that action. Now with these two opposing beliefs you seek resolution of the dissonance. You do this by finding justification in calling this a long-term trade. This post-hoc rationalization is probably no better than tossing a coin, and often worse, as the market is already against you. These rationalisations now cause your perception to become more skewed. You start seeking news you want to see and ignoring the news you don’t. ‘Confirmation bias' now distorts your perception further. The path to losing more money than you ever anticipated on this trade is set. - Even worse, and possibly more damaging for your future, is the possibility this works out well!!! For now you will repeat this behaviour, and may even become part of the way you work. However, this behaviour is in direct opposition to every bit of sound trading advice (See Dennis Gartmans rules of trading). Over time, it will lead to more large losses than your account can handle. - This all came around because you could not face the inconvenient truth 'that you were wrong'. The irony being, that 'being  wrong' is just part of life in a complex world of high uncertainty.

Cognitive dissonance seriously impacts performance in more ways than you realise.

One of my coaching clients provided an excellent recent example of the damage ‘Cognitive Dissonance’ can reap. At the start of this year he turned bearish on stocks. He bought puts in the SP500, and also sold the DAX heavily. Within a few days he looked as if he was on the way to some decent profits. However, the market turned sharply, and went on a long bullish run, the trader however continued to fight this bullish move and his early year gains soon gave way to early year losses. It was now that his 'Cognitive Dissonance' started to come into play, his bearish view was maintained even as the market clearly showed bullish short-term sentiment. To add to the pain, two of his colleagues defected to the bull-side. He was now scampering around trying to find justifications for why he maintained the short trade. These justifications slowly become more desperate, he recalled himself thinking and saying that he was 'more convinced than ever that the market is wrong'. - All the time, in the cruel world that is trading, his losses were growing. Eventually the pain got too much and he pulled the plug on the short trade. - This is what 'Cognitive Dissonance' does, it can divorce one from reality, and force them to start defending their ego and pride at the cost of objectivity. - No one is immune from getting caught in this sort of trap, this trader was no novice but a senior 'Portfolio manager' at a major hedge fund. To his credit, he recognized this afterwards and when we discussed it in a coaching session he was able to exorcise the ghost of this trade from his psyche.

Whilst this highlights how Cognitive Dissonance impacts trading performance directly, there is a far more devastating indirect element to 'Cognitive Dissonance' which can cause irrevocable long-term harm: Cognitive Dissonance can stop people from learning, and keep them in a 'closed loop' which leads to habitual repetition of mistakes and errors. This can become all the more insidious the more mature one gets. During a trader’s formative years, they are likely to have managers and mentors who point out their faults. However, as traders mature, they are less likely to get this feedback and support. Without this third party perspective, it can become incredibly difficult for people to recognize when they face a 'Cognitive Dissonance', let alone to resolve it in a balanced and objective way. In the above example, the Hedge Fund Portfolio Manager recalled a number of occasions over the years, where he has been stubborn and obstinate in the face of overwhelming evidence that he was wrong. I can also reflect on my own trading within my 25-year career trading FX and rates. There was a dark time in the mid-1990s where I kind of lost my way. I recall a number of similar trading experiences to the example above, perhaps it was not a surprise that my confidence suffered for a couple of years after those experiences.

Cognitive Dissonance Can Kill Your Performance and Potentially Your Career.

The term 'Killer Biases' may sound a catchy title for an article which gets people's attention, however certain biases can literally kill a career, a company (Kodak), and even people. 'The Semmelweis Reflex' is a term which describes the tendency to reject new evidence or new knowledge because it contradicts established beliefs. It was coined after the story of Ignaz Semmelweis, a Hungarian Doctor working in the Vienna General Hospital in the 19th Century. Semmelweis found that mortality rates of women giving birth dropped ten-fold when doctors washed their hands with a chlorine solution between patients and after autopsies. He tried to spread word of his discovery throughout the European medical profession, however his advice was rejected by fellow doctors who refused to believe that their own negligence may have something to do with the death of patients in their care. As a result many thousands of women continued to die needlessly for many years to come. Carol Tavris, and Elliot Aronson, cover this topic far more broadly in a brilliant book, 'Mistakes were Made (but not by me)'. 

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Developing superior 'Cognitive Skills and 'Better Behavioural Practices' is the antidote!

It is incredibly difficult to know when you are in a situation where ‘Cognitive dissonance’ is occurring. Daniel Kahneman calls it correctly when he says “We're blind to our blindness. We have very little idea of how little we know. We're not designed to.”

The best way to avoid ‘Cognitive dissonance’ is to preempt it by developing better behavioural practices. This may not stop every single occurrence of cognitive dissonance, but it can certainly reduce, limit and mitigate the damage. In my recent article, 'The 10 Major Behavioural Traits of Highly Successful Traders ', trait number 5 emphasized 'Humility and Humbleness': Humble traders are less likely to fall victim to their ‘Ego’, and thus less likely to be seriously impacted by ‘Cognitive Dissonance’.
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Beyond the Hype: The 10 Behavioural Traits of Highly Successful Traders.

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Everyone is capable of displaying 'Cognitive Dissonance', it is part of our human operating system, however certain people are able to manage or avoid it far better than others. These people are 'Behavioural Masters'. Behavioural Mastery is vital for successful trading, probably more so than any system, product, analytical tool or service, yet is so undervalued in terms of people's priorities. People may think the likes of Warren Buffet, Paul Tudor-Jones, Ray Dalio, have some super source of informational advantage, however every bit of information they get is available to the rest of the world. The difference is that these people are 'Behavioural Masters', they execute everything that they do a little better and a little smarter. As such they create a behavioural edge. Buffet has his long-term philosophy built around his own specific temperament. Paul Tudor Jones perfected the art of strict discipline and Money Management. Whilst Ray Dalio built his business around his key core principles. 


Our own work at Alpha R Cubed has demonstrated how developing people’s cognitive and behavioural abilities can make a huge difference to their performance. Our coaching and consulting helps people and teams to leverage their behavioural strengths and develop superior cognition to improve how they engage with risk and monetise the uncertainty within financial markets. The table below highlights some examples of how this can help make a huge difference to performance. These are just some examples from bank and hedge fund clients where performance improvements have contributed to multi-million dollar improvements in performance.

These numbers only tell part of the story, client feedback tells another. The following is a from Simon Horwood, formerly Co-Head of Trading for Global FX and Short-Term Rates at Credit Suisse. It is part of a response to an internal inquiry about the coaching's effectiveness: 

"Why I feel this has been successful, are the performances of traders that have been under the programmes tutelage. Now obviously improved market conditions have played a part, as well as luck etc. But one trader who has refused to take part in the 'coaching' has turned out to be the lowest revenue producer for the past two years having been consistently the highest for the previous five. Also, all the individuals that have taken part have become easier to manage, show greater teamwork and just appear to be happier overall. The positive impact on the group has been profound."

Wrap Up.

Cognitive Dissonance doesn’t just affect individuals, it comes to affect teams, group, companies even whole industries and professions even. It is a pernicious bias which operates largely ‘under the radar’ and beyond ‘consciousness’ within our human operating system. Only by developing superior thinking and behavioural skills, and reflective processes, will one be able to reduce the damaging and affect this can have on performance and outcomes.

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Steven Goldstein is a leading Performance and Executive Coach working with Traders, Banks, Energy Firms and Hedge funds: He is Managing Director of at Alpha R Cubed, which works with banks and investment firms to improve their human capital within financial risk businesses. To know more about Alpha R Cubed, visit their website www.alpharcubed.com or email Steven at steven.goldstein@alpharcubed.com.

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Killer Biases:‘Cognitive Dissonance’ an Inconvenient Truth.

Dennis Gartman’s timeless trading rule Number 3 states that ‘Capital comes in two varieties, mental and that which is in your pocket, and that of the two 'mental' is the most important and most expensive’. Mental capital is so difficult to control and manage because our brains and minds do not work in the way we like to think they do. In a perfect scenario, they would work to make rational and sound decisions, where pros and cons are perfectly weighed up, and outcomes considered and actions taken. However, the reality is very different: Our minds and actions, are swayed, cajoled and derailed by different internal and external push and pull factors. These factors heavily influence the way we think, decide and act. Factors which distort our thinking includes biases, emotions, ego, mental blind-spots, human biological limitations, our relationships with other people, and how we act and conform in social situations. 

The field of behavioural finance has emerged over recent years as a way of studying these many different factors. It looks to provide greater understanding of how they impact our decision making, how this affects our actions, and how this impacts they way markets behave.

One of the major areas of interest for Behavioural Finance is human biases; distortions in our thinking often cause us to act in less than rational ways. One of the most impactful of biases on our behaviour is 'Cognitive Dissonance', this is a term which is best summed up as how we cope when faced with 'Inconvenient truths'. When this happens we find ourselves compromised; sharing two differing or opposing beliefs which makes us feel extremely uncomfortable. This becomes more challenging the more we have emotionally staked on it. In these situations we may perform far-reaching rationalizations in order to avoid the discomfort connected to ‘Cognitive Dissonance’. Typically we come down on the side of our initial or invested belief, only changing sides, if at all, when there is overwhelming evidence against us. 

People will go to great lengths to convince themselves that a decision they made was the right decision:

In trading and investment, people live and die by the decisions they make. 'Cognitive Dissonance’ is one bias, which can seriously handicap the quality of these decisions.  Traders and investment professionals, whose perceptions are skewed, will not read the markets objectively and will not act or react rationally to new data or news. Inconvenient truths make people highly selective in terms of their analysis of markets, and leads to sub-par choices based on flimsy foundations. 

A simplified example of cognitive dissonance from my own experience.

A few years ago when charges were brought against Lance Armstrong by the US anti-doping agency, I found it difficult to accept. Armstrong had long been one of my heroes having fought and overcome a prolonged battle with cancer to achieve incredible success in the world of cycling. I had invested a lot of time and energy in being a huge Armstrong fan, I read his books, watched anything on the TV about him, and sang his praises to all and sundry. Thus when this new evidence was presented about his cheating, I found myself extremely challenged, I was suffering from two opposing beliefs in my mind.

Belief 1) Lance Armstrong is one of my all-time great sporting heroes and a living legend.

Belief 2) Cheating is wrong, and I despise anyone who cheats.

These two opposing beliefs occurred together in my mind, either Armstrong was a hero of mine, or a cheat. At first, I found myself defending Armstrong: ’They must be wrong’, ‘They always had an agenda against him’, ‘What was he supposed to do, everybody else was doing it.’. The fact that Armstrong had been found guilty of cheating was an 'inconvenient truth' too far for me. What was occurring what that I suffered a ‘Cognitive Dissonance’, and as a result I tried to find rationalizations and justifications to resolve it.

Cognitive dissonance seriously impacts trading and investment performance. 

In trading and investment situations, and in any role where high level decisions-making is required, such as management,  'Cognitive Dissonance' can seriously impact a persons performance. Whilst in many cases the effects will be relatively trivial, there will be many more serious examples. 

Consider this, you have taken a bearish view on US stock. The market has been on a tear for many years, and you are starting to think that it is well overvalued. The global economy is weak, the banks are still a mess, China is about to blow up, etc, etc. You've read this bearish analyst, and that bearish report, you are convinced that the world is going to hell in a handbasket. So you sell your stock portfolio, you buy puts in the SPX, and maybe decide to sell some DAX to just to spread the joy. But then the world does not collapse, far from it, the market carries on roaring higher, as it has done so for many years now. You are heavily invested however in this position, both personally and mentally. you convince all around you that the world is doomed, you call it a fools rally, and feel that the top is even closer now.  - Who knows, maybe yo will be right, but you are now fighting reality, the market is again on a tear, and you are hurting. - Not only are you losing money, but you are on a wrong call. Now, the data is starting to come out better, oil prices are falling, taking some of the pressure off the economy, Chinese and US data are surprising marginally to the upside, the FED is talking easier money for longer, and other central banks are playing ball. But you don't see it, or you refuse to see it more like. - And so the pain goes on, and so the market goes higher, and so your account dwindles. This is what Cognitive Dissonance does, it divorces you from reality and objectivity.     

However there is another damageing aspect to 'Cognitive Dissoannce', which is just as, if not more harmful over the longer term, but which is not obvious at the time. 'Cognitive Dissonance' stops you from learning from your errors. The consequence of this is that it curtails your development and leads to you repeating the same mistakes. In fact this affect becomes all the more insidious the more mature one gets. During a traders formative years, they are likely to have individuals, managers and mentors who are pointing our their faults, or reproaching them when they make mistakes. However as individuals mature in their role, they are less likely to get this feedback and support. On one's own, it can be incredibly difficult for people to recognize that they face a 'Cognitive Dissonance', let alone to resolve it in a balanced and objective way.

This is one of the reasons why it is so useful to have a third-party perspective from a neutral party. This is one of the reasons why the coaching work I do with traders and investment managers is so powerful. In my coaching I often come across many traders who were displaying some form of ‘Cognitive Dissonance’ that has been negatively affecting their performance. The Behavioural Performance Coaching starts working with the trader to help them impose their 'Cognitive Capabilities' and become more conscious of how and when their behaviours are potentially derailing their performance. The coaching helps traders channel their energy more effectively toward making money, and monetizing risk. 

An example of how 'Cognitive Dissonance' impacts trading and investment.

In trading and investment, people are constantly trying to bring some semblance of certainty to the world of the highly uncertain. However, financial and commodity markets are by their nature, inherently uncertain. Thus the one thing that is certain is that often you will be wrong. However, as well as being highly damaging to a trader’s ego, being wrong can be extremely hard for people to deal with. This often leaves people caught in a state of ‘Cognitive Dissonance’. 

Belief 1) I am good at my job, and deserve the rewards that come from being a trader.

Belief 2) I was wrong, how can I be any good at my job.

Adding into the mix, ‘Belief 1’ underlies ‘self-belief’, ‘self-confidence’, and ‘positive outlook’, which are all valuable attributes in the daily battle with the markets.

Faced with this dilemma traders may make many excuses or might come up with what appear as valid justifications for their actions. –‘Anybody would have done the same in the circumstances’. They may blame someone else or other parties. - ‘Others must have had inside information,’, ‘That research report was rubbish’. Or they may just act dismissively of it. And with that they move on, no lesson learned, no reviewing what they could have done differently or better, and thus the seeds are sewn for a future repeat. This is what ‘Cognitive Dissonance’ does, it shuts you off from reality, it closes your mind, you lose objectivity, and thus you do not learn from your mistakes and are doomed to the repeat them. At its most serious, sub-par behaviours can become entrenched ways of thinking, and when that happens, the outcome is rarely good. 

What other approach could a person take when faced with Cognitive Dissoance?

‘Cognitive Dissonance’ is often an ego defensive action. In the Lance Armstrong example, I had mixed up my ego with my admiration for Armstrong, as such I was really defending my ego. In the second example, the trader would also have been defending their ego. Being wrong can make a trader feel stupid, embarrassed, humiliated. They may feel their reputation is at stake. Of course in reality, no one cared that I was a fan of Lance Armstrong, and if they did – ‘So what!’ – Likewise with the trader; who cared that the trader was wrong. In trading, everyone is wrong sometime, that is the nature of risk and uncertainty. If a trader can start accept this and understand this, then suddenly losses are not so threatening. Suddenly being wrong is not such a bruising event for the ego. If you can accept that you will be right and wrong often when trying to achieve a positive return overall, then it becomes easier to accept. Once you can take this attitude, you can look at your work, and start to consider if there was anything you could have done differently. If you can examine your trades and your processes, then perhaps you can see what you can do better or differently next time. Perhaps next time when you are wrong it will be less damaging, and perhaps when you are right maybe you will able to squeeze that bit much more out of it, and in the end, those small changes can make a very big net difference.

The theory of Cognitive Dissonance is a fascinating topic which arises often in discussions with traders and investment managers as part of the performance coaching. For further reading I would suggest two excellent books. 'Mistakes Were Made But Not By Me' by Carol Tavris and Elliot Aronson, and 'Black Box Thinking, the Surprising Truth about Success’ by the excellent Matthew Syed.

Finally: I did end up resolving my ‘Cognitive Dissonance’ with regard to Lance Armstrong, I accept he was a cheat and a liar. However, it took me some time to come around to accept that. I first wrote a blog about ‘Lance Armstrong and Cognitive Dissonance’ back in 2012, the article can be seen here. What is interesting is to look at the final sentence in that blog, ‘Judging by the numerous articles I have read since Armstrong announced he would not be fighting the claims, I do not think I am alone; he still seems to be held in great esteem, if just a little tarnished’. It is clear that at the time I was still struggling to resolve my dissonance.

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Cognitive Dissonance: Where traders start to dig holes for themselves.

‘Cognitive Dissonance’ is a theory which states that we like to seek consistency in our beliefs within our mind. If we hold two conflicting or opposing beliefs we get a feeling of discomfort or unease, as such we attempt to reduce this dissonance in our minds caused by holding these two conflicting beliefs. This dissonance reduction may involve us self-justifying or deceiving ourselves, this includes acquiring or inventing rationales which resolve this internal conflict, or modifying previous held beliefs.

As mentioned, dissonance reduction often takes the form of a self-justification of self-deception. Some examples of this occur all around us, smokers typically display cognitive dissonance, they know it is bad for them, and that it will probably shorten their life, but they’ll reduce the dissonance and justify the smoking by thinking ‘It’s not really as bad as they say otherwise it would be illegal’ or ‘I’ll worry about that when I’m older’, etc.  Dieters will also fall victim to this, they may justify having a chocolate or piece of cake by thinking ‘Its just one, what harm can that do?’ Last year in the UK there was a major scandal involving expenses fraud by Members of Parliament, whilst passing anti-fraud legislation, they had no issue with this contradiction, claiming their expenses were entitlements. Police will often continue to prosecute suspects whilst wilfully ignoring contradicting evidence. Academics have been known to doctor research evidence to suit their arguments, explaining this away by firmly stating their conviction in their beliefs.

Cognitive dissonance is all around us, and is often intertwined with other biases and behavioural traits. In a sense procrastination is only achievable because we enact dissonance reduction. E.g. ‘I’ll do that piece of work later, after all what’s the rush’.

So what and how does these affect traders and investors directly?

I’ll provide some simple examples.

Firstly, assume I have a long position in the SP500 Index future, say I bought some contracts at 1250. I then placed a protective stop at 1240 whilst looking for an upside target at 1280. I have a personal trading rule that I never move a stop further away once it is in place. – Later that day, the SP500 is trading down towards 1242, I sense that my stop is too tight and that this will bounce. I have a cognitive dissonance, my original belief was that if the market traded down to 1240, I was out of this trade, I was not prepared to risk any more on this trade, based off my initial analysis. Now I am thinking that this may trade lower and then bounce, however I will be stopped out before then. My dissonance here is that I need to remove my stop and place it at a lower level, but I never move stops once in place, this is a ‘golden trading rule’ for me. However, I decide in this case that I can break the rule on this one occasion, my though process is ‘just once it won’t hurt, I have a really good feeling about this’.

Hence I move the stop to 1230. The best thing that could happen in this case, is to get stopped out at 1230 immediately, as I would have instantly been penalised, and should thus learn the error of my ways. But assume that instead the SP500 drops to 1235, the stop is not triggered, and the SP500 bounces and rallies to my target. – I will feel that I was justified in moving my stop, and hence will be almost certainly giving me the green light to repeat that. Thus now a sensible rule, put in place as a form of discipline is jettisoned, and a slippery slope has been started, almost certainly with disastrous future consequences for my trading.

Another trading example shows how self-deceit rather than self-justification can be the dissonance reduction technique. In this example, assume that a trader was playing the USDJPY carry trade in 2007, and had decided to go long USDJPY on a break over 121, convinced that this was heading higher to 132 and maybe higher. His conviction is built on that the fact that this has been trending higher 2 years, is buoyed by the fact that he is gaining nearly 5% yield pickup on a daily basis, and is boosted by the knowledge that just about every major player is in on this trade. - Briefly the USDJPY rallies to 124, he is making money and feels good, all the stars seem in line, and in his head he is thinking of the future rewards this will bring. But from 124 the USDJPY declines and breaks a key level at 118. Now he is sitting on a loss, and looking at analysis which is indicating a major reversal is underway.

The problem for the trader, in this example, is that he has attached himself to this position; he had in a sense bonded and indentified with it. His evidence firmly suggested that a deeper reversal is underway, but he decides to label this a minor correction. This new analysis had created a cognitive dissonance for him; he resolved the dissonance by trivialising his normal rational analysis and invoking a self-deception; he decided that ‘this time it was different’. (There are a couple of other cognitive biases at play here, - The endowment effect; valuing an asset more highly when we own it, and the previously discussed confirmation bias). Eventually this trade would have suffered a huge loss, USDJPY declined sharply to below 100.   

The problem with ‘dissonance reduction’ techniques is the use of ‘justifying terms’ – such as ‘just once’, or ‘this time its different. Of course we never do something ‘just once’, in fact usually when we break a rule, we tend to repeat breaking it, particularly if we’ve justified it and been proved right on that occasion.

In the Carol Tavris and Elliot Aronson excellent book, ‘Mistakes were made (but not by me)’, they talk about how this process takes hold in the creation of corrupt police practices. A good young highly principled cop sees an older cop plant some evidence. He is angry, confused and conflicted, but the older cop says to him ‘We’re the good guys, these criminals are getting away with crimes that we know they are committing, isn’t it better that when we know something and can not prove it, we make it provable, its not like we do this regularly, but in this case its different, it’s a one-off.’  The young policeman decides to look the other way on this occasion, just once. – A couple of years later, this happens again, but having already justified it previously he convinces himself of the value of this. Eventually some years later, without a hint of conscience, he is repeating this behaviour himself. – He may not necessarily be a corrupt cop, he may be a good cop who has adopted some bad practices, but either way it is quite likely that innocent people are going to prison somewhere, and guilty people are out running free.

Cognitive dissonance can be the loose thread, which slowly pulled over time ends up destroying a whole fabric. In a trading/investing sense this is often what can happen; a sensible reliable trading approach can start to come undone, and as in the first example above, it is not the initial action, but rather what it implies, where the problem often starts. In the second example, the self-deceit can lead to a warped view of the market. From my own experiences working with traders, cognitive dissonance can lead to traders digging themselves deeper and deeper holes and by the time they realise what has happened it may be too late.