To be a Crypto Investor: Say No to 14 Cognitive Biases

June 29, 2022

14 cognitive biases to be a good crypto investor

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If you want to be a better crypto investor, you need to master cognitive biases.They are subconscious errors in thinking that cost you money.

Here are 14 cognitive biases that a better crypto investor would avoid:

This was inspired by @thedefiedge. Check out his tweets to learn more about DeFi.

1. Unit bias

People prefer to buy a “whole unit” of a token, rather than a fraction of it.
Don't overweigh the value of a token because it's "cheap."
Look at the value of the tokens.

2. Anchoring bias

Don’t over-rely on the 1st piece of information you have.
You missed the Bitcoin at $1,000, and can’t afford it at $5,000.
Evaluate it based on its POTENTIAL, not its PAST.

3. Confirmation bias

Don’t just seek out what you want to hear.
Open to FUD (Fear, uncertainty, and doubt) too.
See if they make sense.

4. Sunk cost bias

Sunk cost means the cost that has occurred and can't be recovered.

We have a tendency to keep investing more money or OVER-committing because we're scared of losing our original investment.

Don't throw good money after the bad.
Look at the bright side, what you have left could be better off investing somewhere else.

5. Loss aversion

Losing money provokes stronger feelings than gaining money.A study shows that the brain typically assigns 2.5x to a loss.

Therefore, loss aversion makes people wait it out, instead of selling the investment to stop the bleeding.

Loss Aversion leads to risk avoidance
There has been a handful of rugs in DeFi.
Weigh the risks vs rewards properly.

6. Recency Bias

People overweight RECENT information and events.

You can beat recency bias by zooming out on the charts.

7. Overconfidence Bias

We overestimate our own abilities.

The key to beating Overconfidence is solid risk management strategies

8. Endowment Effect

You become emotionally attached to your bags.
We place a higher value on investment because we own it.
To Beat The Endowment Effect,  try Zero-based decision-making.
Make decisions that are neutral.

9. Survivorship Bias

Someone turned $8,000 of Shiba Inu into $5.7B.
You don't hear about the thousands of others who turned $8k into $500
The media prefers writing about the winners, and this skews your perception of the odds.

10. Narrative Bias

Humans love stories. It helps us make sense of the world.
Some coins explode because of the story.

After skyrocketing more than 800% last January and then plunging as much as 70%, @GameStop has continued to draw great attention from retail investors.

People invested for the NARRATIVE.

11. Herd Mentality Bias

Investors’ tendency to follow and copy what other investors are doing.
They are largely influenced by emotion and instinct, rather than by their own independent analysis.
If you've ever felt FOMO, it could be because of herd mentality

12. Availability Heuristic

You make judgments based on how easy it is to remember information.
After major airplane crashes, there's usually a fear of flying.

However,

- 1 in 9,821 die in a plane crash
- 1 out of 114 die in a car accident

Planes are much safer

In Crypto, the availability bias presents itself in marketing.
A coin might be pumping because it has great marketing.
Marketing is important, but make sure that it isn't masking a terrible project.

13. Outcome Bias

Outcome bias is an error made in evaluating the quality of a decision when the outcome of that decision is already known.
You invest $10k into a shitcoin that is now worth $100k.

That had a great outcome, but it was a poor decision.
Another angle of Outcome Bias
Imagine if the scenario was replayed a thousand times.

You have to account for variance.
You can do everything right and the outcome STILL won't be right.

That's life.
But you should always make the decision with the best ODDS and PROBABILITY.

14. Authority Bias

This is our natural tendency to follow the leader.
Once we believe someone is an expert, we trust everything they say.
"They're the expert, they must be right!"
Well, experts can be wrongExperts can have ulterior motives

How do you stop Cognitive Biases?

Being aware of them is the very first step. Good job!

Here are some further strategies:

  1. Call Them Out
    If you spot the biased behavior, stop it.
  2. Develop a Cognitive Bias checklist
    Keep aware of your thinking flaws.
  3. Consider creating your own Systems for investing
    Formulas can help keep your emotions in check.
  4. Keep a trading log.
    A Google Spreadsheet might help to record all trades, including your reasons to quit.
  5. Use Cognitive Biases to your advantage
    Understanding cognitive biases mean you can profit from others.

Sources

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