The Economic Consequences of Cognitive Dissonance
George A. Alerlof; William T. Dickens The American Economic Review, Vol. 72, No. 3 (Jun. 1982), 307-319.

  1. An Overview
    1. The Basic Premises
      1. Persons have preferences over states of the world.
      2. Persons have preferences over their beliefs about the state of the world.
      3. Persons have some control over their beliefs.
      4. Persons tend to select information that confirms their desired beliefs.
      5. Persons tend to avoid information that conflicts with their desired beliefs.
      6. Beliefs once chosen, persist over time.
    2. The Fundamental Model
      1. Workers in dangerous jobs are oblivious to the dangers involved.
        1. Benzene workers refused to believe the chemicals were dangerous.
        2. Nuclear plant employees would leave their radiation detection tags in their desks or at home.
  2. Psychological Evidence for the Basic Premises
    1. Persons are uncomfortable in maintaining two seemingly contradictory ideas.
      1. Most cognitive dissonance reactions stem from peoples views of themselves as "smart, nice people." Information that conflicts with this image tends to be ignored, rejected, or accommodated by changes in other beliefs.
      2. Persons who have made decisions tend to discard information that would suggest such decisions are in error because the cognition that the decision is in error is in conflict with the cognition that ego is a smart person.
  3. A Model
    1. General Description of the Model
      1. In the first period Workers have a choice between working in a hazardous job or a safe job:
        1. Workers will chose the job with the highest pecuniary and non-pecuniary benefits. (Highest pay with no benefits).
        2. Workers in the hazardous industry have to choice but to face the possibility of an accident as there is no safety equipment available.
        3. If the cost imposed by future wrong decisions is not too great, workers will, because of cognitive dissonance, come to believe that the job is really safe.
      2. In the second period, cost-effective safety equipment becomes available.
        1. Because the workers believe the job is safe, they will not purchase the safety equipment.
        2. Safety legislation is needed to restore Pareto optimality since workers have an incorrect assessment of the marginal rate of substitution between safety equipment and money income.
    2. Assumptions of the model
      1. The labor market in the safe industry.
      2. The demand for the product and the supply of the product in the hazardous industry
      3. The non-pecuniary disadvantages of work in the hazardous industry
      4. The relation between fear and the perceived probability of accident and the worker's choice.
    3. Description of the Equilibrium of the Model
    4. Illustration of the Equilibrium
    5. The Equilibrium Discussed
    6. Precommitment Contracts
  4. Potential Applications
    1. Sources of Innovation
      1. Because of cognitive dissonance, beliefs are persistent once they are adopted.
      2. Persons tend to avoid or resist new information that contradicts already established beliefs.
      3. Therefore, innovators are previous outsiders to an activity. Paradigm shifts are affected by those who are not formally reared and trained.
    2. Advertising
      1. Some advertising gives the consumer external justification for purchasing a product.
      2. People do have needs and tastes and they do buy products to satisfy them.
      3. People like to feel that they are attractive, socially adept, and intelligent. It makes them feel good to hold such beliefs about themselves. Ads facilitate such beliefs--if the person buys the advertised product.
      4. When the value of the belief is less than the additional cost of the advertised brand, advertising will fail.
    3. Social Security
      1. Social Security Legislation is based on the belief that persons left to their own devices tend to purchase too little old age insurance.
      2. If there are some persons who would simply prefer not to contemplate a time when their earning power is diminished, and if the very fact of saving for old age forces a person into such contemplation, there is an argument for compulsory old age insurance. Persons may find it uncomfortable to contemplate their old age. For that reason, they may make the wrong tradeoff, given their own preferences, between current consumption, and savings for retirement.
    4. Economic Theory of Crime: If you increase the cost of something (committing a crime), less will be consumed (crimes).
      1. Its true that less obedience will be observed when there is greater deterrence.
      2. Once the threat of punishment is removed, people who have been threatened with relatively severe punishment are more likely to disobey than those threatened with relatively mild punishment.
      3. Children who are punished severely for aggressive behavior at home are more violent at school than those who are more mildly punished.
      4. Those who obey rules for which the penalty of violation is relatively small need to create an internal justification for their actions.
      5. Most criminals act under the assumption that they will not get caught, not by the severity of the punishment.
      6. Self-motivation to obey the law is a key factor in crime reduction and this may decrease with the severity of the punishment.
        1. Crimes are motivated by perceived needs outweighing consequential reality.
  5. Conclusion
    1. The approach in this paper suggests a good reason why non-informational advertising is effective, why social security and safety legislation are popular, and why persons fail to purchase actuarially beneficial flood and earthquake insurance. The explanations do not rely on the assumption that people are basically misinformed--if they believe something other than the truth, they do so by their own choice.