Since the publication of The Wealth of Nations , economists have built an entire profession on a single powerful theory of human behavior based on a few simple assumptions. That model has been fruitfully applied to a wide range of problems. But, while economists have been elaborating their analysis, keeping their basic behavioral assumptions the same, sociologists, anthropologists, political scientists, and psychologists have been developing and validating models based on very different assumptions. For most types of economic behavior, the economists' model is probably quite adequate. The models developed by other social scientists are generally ill-suited for direct incorporation into economic analysis. Nevertheless, insofar as studies in these other disciplines establish that people do not behave as economists assume they do, economics should endeavor to incorporate these observations. This paper presents an example of how this might be accomplished in one special case. Psychologists have devoted considerable attention to the theory of cognitive dissonance. This theory has been used earlier by Albert Hirschman (1965) to describe attitude changes toward modernization in the course of development. Our paper expands the economic applications of cognitive dissonance and analyzes its welfare consequences in a formal model. An overview The basic premises To begin, we must translate the psychological theory into concepts amenable to incorporation into an economic model. We think the theory of cognitive dissonance can be fairly represented in economists' terms in three propositions: First, persons not only have preferences over states of the world, but also over their beliefs about the state of the world.