As a psychologist, I'm really interested in how people think and make decisions. The human brain is a fantastic machine, but its resources are limited. That's why we often make choices based on biases and heuristics that help us save time. These tendencies though can lead to suboptimal outcomes when investing, especially in a highly volatile market like crypto.
- Confirmation Bias: Also called "cherry-picking effect" refers to the tendency to only look for news and information that confirms what you already believe. "I want to go all in with Bitcoin, so I'll only read Arthur Hayes' analysis and nothing else."
- Sunk Cost Fallacy: Given that you have already spent much time and money on a project, you keep doing that hoping it will recover, even though the chances are pretty low. (I think valid examples for many of us can be XRP or LUNA). This mixes with Loss Aversion, a well-described tendency to react more emotionally to losses than to wins.
- The bandwagon effect: basically coping others without thinking for yourself. "I'll invest in whatever this youtube guy is shilling because everyone is doing that and I won't be left out".
- Anchoring Bias: you anchor your expectations about a project's future value based on its initial price or the specific price you opted in.
- Overconfidence Bias: you overvalue your chances despite every rational statistic. This can lead to excessive risk-taking, ignoring potential risks and flaws in your strategies: "90% of traders lose money, but I'm a big brain dude that will absolutely beat the market"
- Availability Heuristic: basically basing your decisions on the most recent news that comes to your mind, without considering important past information. "Many people just made a ton of money with meme-coins, let's sell my car to invest in MARSU".
Even though I've studied these effects, I'm the first that sometimes falls for them, but I think that being conscious of these biases can help us make more rational decisions more often, and they also have cool names to learn. What mistakes have you made because of similar heuristics?
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