Avoid These 14 Cognitive Biases and Become a Better Crypto Investor
Original author:The DeFi Edge
Compilation of the original text: Gu Yu, Chain Catcher
Original author:
Compilation of the original text: Gu Yu, Chain Catcher
In order to become a better crypto investor, I studied hundreds of cognitive biases. Here are 14 of the most important:
1) Unit deviation
People are more willing to buy "whole units" of tokens rather than fractions of them. This is why meme tokens are exploding. Don't overstate the value of a token just because it's "cheap". Learn how market capitalization works.
2) Anchoring bias
Over-reliance on the first piece of information you have. You've heard of the $1000 Bitcoin. You missed it. Then it goes up to $5,000. You don't want to buy it again. It's "too expensive" in your mind. Evaluate it based on its potential, not its past.
3) Confirmation bias
You only want to see the news you want to see. You only follow people who say good things about X coin. You unfollow and block anyone who spreads "FUD". When you invest, look for and research FUD to see if it works.
4) Sunk cost bias
Costs that have been incurred and cannot be recovered. We tend to keep investing more money or overcommit because we are afraid of losing our initial investment.
5) Loss aversion
Losing money feels worse than making money. Anyone who has been to Las Vegas knows what I'm talking about. Winning +$100 feels different than losing $100. Loss is painful. One study showed that the brain typically allocates 2.5 times as much to loss as it does to loss. +250 = -$100
For example, when your investment drops 50% and there is more bad news. You can close the trade and cut your losses. Loss aversion means some people would rather wait for it to be over. They are afraid of "losing" money by selling.
Loss aversion leads to risk aversion. There have been some scams in DeFi, and I've seen people swear off investing in DeFi! Their losses mean they will miss out on life-changing gains. Get the right balance of risk and reward.
6) Recency Bias
We overestimate recent information and events. "ETH price is boring. I'm chasing down cap tokens" Then they get destroyed in a bear market. You can overcome recency bias by zooming out on the graph.
7) Overconfidence Bias
We overestimate our abilities. We get lucky a few times and think we are smarter than we are. The key to beating overconfidence is a solid risk management strategy.
8) Endowment effect
You develop an emotional attachment to your portfolio. We place a higher value on an investment because we own it. I see a lot on ETH maximalists. They get huge bang for their buck and become fond of it. They ignore all other L1s.
How to overcome the endowment effect for zero-based decision making. "If I didn't own this investment, would I invest today?" This makes your decision more neutral.
9) Survivor bias
Brad Pitt moved to Los Angeles and worked as a waiter before becoming a movie star. Many followed his path, hoping to do the same. You don't hear about the thousands of other people who have tried the same thing and failed.
Someone turned an $8,000 Shiba Inu into $5.7 billion. You don't hear about thousands of people turning $8,000 into $500. The media prefers to report on the winner, which can distort your perception of the odds.
10) Narrative bias
Human love stories help us understand the world. Some coins exploded because of this story. Remember last year's GameStop? This is a revolution against Wall Street. People invest in narrative.
11) Herd mentality bias
Investors tend to follow and copy what other investors do. 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.
12) Availability bias
You make judgments based on how easy it is to remember information. After a major plane crash, people often experience a fear of flying. However, 1 in 9,821 people dies in a plane crash and 1 in 114 dies in a car accident. In fact, airplanes are safer.
In Crypto, usability bias appears in marketing. A coin may be pulled because it has good marketing. Marketing is important, but make sure it's not covering up a bad project.
13) Result bias
Outcome bias is the mistake made when assessing the quality of a decision when the outcome of the decision is already known. Imagine going all-in with AA vs JJ in poker (AA has an 80% chance of winning in this case), and losing. You made a great decision and it turned out badly. You invest $10,000 in an altcoin and it's now worth $100,000. This had a great outcome, but it was a poor decision.
Another angle on the bias in the results is, imagine if the scene was replayed a thousand times. You have to account for differences. You can do everything right and it still won't be right. this is life. But you should always make your decisions with the best odds and probabilities.
14) Authority Bias
It is our natural tendency to follow the leader. Once we believe someone is an expert, we believe everything they say.
How do you stop cognitive biases? Here are some strategies I use to reduce cognitive bias damage.
Develop a list of cognitive biases. Whenever I make an investment decision, I check my list of cognitive biases. This made me realize the flaws in my thinking.
Consider creating your own investing system. Formulas can help you manage your emotions.
