To be a better crypto investor, I research hundreds of cognitive biases. Here are the 14 most important:
Unit deviation
People would prefer to buy "whole units" of tokens rather than a fraction of them. This is why meme tokens exploded. Don't overstate the value of a coin just because it's "cheap". Learn how market cap works.
Anchoring Bias
Over-reliance on the first piece of information you have. You've heard of $1,000 Bitcoin . You missed it. Then it goes up to $5,000. You don't want to buy any more. It's "too expensive" in your mind. Evaluate it by its potential rather than its past.
confirmation bias
You only want to see the messages you want to see. You only focus on those who have good things to say about X tokens. You unfollow and block anyone spreading "FUD". When you invest, look for and research FUD to see if it works.
sunk cost bias
Costs that have already been incurred and cannot be recovered. We tend to keep investing more or over-investing because we are afraid of losing our initial investment.
loss aversion
Losing money feels worse than making money. Anyone who's been to Las Vegas knows what I'm talking about. Winning +100 does not feel the same as losing $100. Losing is painful. One study showed that the brain typically assigns 2.5 times the loss to the loss. +250 = -$100
For example, when your investment drops by 50% and there is more bad news. You can close trades and cut losses. Loss aversion means some people would rather wait for it to end. They are afraid of "losing" money by selling.
Loss aversion leads to risk aversion. There have been some scams in DeFi and I have seen some people swear off investing in DeFi again! Their losses mean they will miss out on life-changing gains. The right balance of risk and reward.
recency bias
We overestimate recent information and events. " ETH price is boring. I'm going after low market cap coins" Then they get destroyed in a bear market. You can overcome recency bias by shrinking the graph.
overconfidence bias
We overestimate our abilities. We got lucky a few times and thought we were smarter than we were. The key to overcoming overconfidence is a solid risk management strategy.
endowment effect
You develop an emotional attachment to your portfolio. We place higher value on our investment because we own it. I see a lot on ETH maximalists. They get a huge benefit from it and become a soft spot for it. They ignore all other L1s.
How to overcome the endowment effect in zero-based decision making. "If I didn't own this investment, would I invest today?" This makes your decision more neutral.
survivorship 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 haven't heard of thousands of other people who have tried the same and failed.
Someone turned an $8,000 Shiba Inu into $5.7 billion. You don't hear about thousands of people who turned $8,000 into $500. The media prefers to report on the winner, which distorts your perception of the odds.
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.
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.
Availability Bias
You make judgments based on how easy or difficult it is to remember the information. People are often afraid to fly after a major plane crash. However, 1 in 9,821 people will die in a plane crash, and 1 in 114 will die in a car accident. In fact, planes are safer.
In Crypto, usability bias occurs in marketing. A coin can be pulled because it has great marketing. Marketing is important, but make sure it doesn't mask 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 already known. Imagine going all-in with AA against JJ in poker (in this case, AA has an 80% chance of winning) and then losing. You made a great decision and it turned out badly. You invested $10,000 in an altcoin, which is now worth $100,000. This had a good result, but it was a bad decision.
Another angle of skewed results is, imagine if the scene were replayed a thousand times. You have to consider the difference. You can do everything right and still not be right. this is life. But you should always make your decision with the best odds and probabilities.
authority bias
This is our natural tendency to follow leaders. 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 my thinking flaw.
Consider creating your own investment system. Formulas can help you control your emotions.
Keep a transaction log. I keep a Google spreadsheet of all my transactions. In addition to the financial data, I also wrote some of my arguments. If I quit early, I will write down any problems I have. By the way, I plan to create a free template for you.
Use cognitive biases to your advantage. Understanding cognitive biases means you can profit from others. Tokens with good narrative + charismatic leaders + marketing (usability bias) + herd mentality. The more you worship, the more likely you are to make a profit.
