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Common Cognitive Biases in Cryptocurrencies

Have you ever bought at the top out of fear of missing a coin?

Have you ever sold a blue chip and got into a car with a junk coin?

Have you ever refused to cut the meat when you lost 50% and continued to lose 45%?

The above are all cognitive biases at work, and it is the wrong investment thinking that leads to these results.

To become a better investor, we researched hundreds of cognitive biases and came up with 14 of the most common. If you avoid these points in the decision-making process, the win rate must be much higher. Below is the text.

Unit Deviation

People prefer to buy entire units of coins rather than a fraction of it.

This is why meme coins exploded.

Don’t take it too seriously just because it’s “cheap”.

To understand how market cap works.

Anchoring Bias

Over-reliance on initially obtained information.

The first time you hear about Bitcoin, the price is $1,000. But you missed it. Then, it rose to $5,000. You don’t even want to buy it because it’s “too expensive” in your mind right now.

Evaluate a coin based on its potential rather than its past.

Confirmation Bias

You only look for the information you want to hear.

You only pay attention to those who have good things to say about X Coins.

You quit and block anyone spreading “FUD”.

When you invest, look for and research FUD to see if it is true.

Sunk Cost Bias

A sunk cost is a cost that has already been incurred and cannot be recovered.

Many people tend to keep investing more for fear of losing their initial investment.

If you lose 70% on a coin and you have 30% left, that 70% is gone, and the remaining 30% is better invested elsewhere than hoping for a rebound in your initial investment.

Loss Aversion

It feels worse to lose money than to earn less.

Losing is painful. One study showed that the brain typically assigns 2.5 times as much pain to loss.

As an example, when an investment is down 50% and there is more bad news, you can close a trade to cut your losses. But a person with loss aversion would rather wait for it to be completely over than cut the meat, because he is afraid that if he sells it, it means “real loss”.

Loss aversion leads to risk aversion. There are so many terrible projects in DeFi that some people have vowed not to invest in DeFi anymore, and this loss aversion means they will also miss out on the life-changing gains. Please properly balance risk and reward.

Recency Bias

People are overly focused on the latest information and events.

“The price of ETH is boring. I’m going after small cap coins.”

Then, they were destroyed in a bear market.

You can overcome recency bias by shrinking the candlestick chart.

Overconfidence Bias

People overestimate their abilities.

Because of a few times of luck, I feel like I’m smarter than I actually are.

The key to overcoming overconfidence is a solid risk management strategy.

The Endowment Effect

You become emotionally dependent on your coin, and just because you hold it, you give that investment a higher value.

I see this with ETHists. They get huge gains from it and become so fond of it that they ignore all other L1s.

How to overcome this? Then ask yourself, “If I didn’t own it, would I still choose to invest in it now?” This will make your decision more neutral.

Survivor Bias

You heard that someone turned $8000 of SHIB into $5.7 billion.

But you didn’t hear that thousands of people turned $8,000 into $500.

The media prefer to write about the winner, which distorts your perception of the odds.

Narrative Bias

Humans love stories, they help us make sense of the world.

Some coins will explode because of a good narrative.

Remember last year’s GameStop? It was a revolution against Wall Street, and people would invest in that narrative.

Herd Psychology Bias

Investors tend to follow and copy what other investors are doing.

They are largely influenced by emotions and instincts rather than by their own independent analysis.

If you’ve ever felt FOMO, it’s probably because of herd mentality.

Laws of Availability

People make judgments based on how easy it is to remember information.

For example, people are often afraid to fly after a major plane crash, even though planes are safer than cars.

In the crypto world, exploitability biases show up in marketing. A coin may rise because it has good marketing. Marketing does matter, but make sure it’s not masking a bad project.

Result Bias

Outcome bias is the error made in assessing the quality of a decision when the outcome of the decision is known.

Imagine, in Texas Hold’em, you have AA, the opponent has JJ, and you are all in. In this case, AA has an 80% chance of winning, you make a good decision, but you end up losing.

You invested $10,000 in junk coins, which are now worth $100,000. That sounded good, but it was a bad decision.

Once a certain scene is repeated a thousand times, you have to account for the differences.

You can do everything right, and the result can be wrong. This is life. You should always make decisions with the best odds and possibilities.

Authority Bias

People tend to trust experts, “They’re experts, they must be right!”

However, experts may be wrong, and experts may have ulterior motives.

Finally, there are some ways to avoid cognitive bias:

  • Develop a list of cognitive biases for review when making decisions to avoid thinking deficits.
  • Establish your own investment system to help you control the impact of emotions.
  • Develop a transaction log. In addition to documenting financial changes, write down the investment thesis and reasons for exiting.
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