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Author Topic: Bitcoin and Cognitive Bias!  (Read 175 times)
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August 21, 2018, 11:19:48 AM
Merited by DdmrDdmr (2), odolvlobo (1), paxmao (1), SwayStar123 (1)

Hi folks, I thought it would be an useful idea to start a thread and mention cognitive bias when it comes to Bitcoin and the future of it (and other coins).

So we'll agree that Bitcoin will either make its owners millionaires or it is a bubble ready to burst at any time! These two parallel worlds, two "populations'' looking at the same situation but drawing totally different conclusions.  Grin

It reminds me of the rise of Donald Trump in 2016, and this kind of situation usually indicates strong cognitive biases which distorts the perception of some of these people (if not all!).
This is particularly true in the world of cryptocurrency because cryptos' use is currently very limited, and their value depends a lot on speculation about their FUTURE value.

I can not say that I am an expert in Bitcoin or crypto but on the other hand I am much more interested in cognitive biases.

1- Narrative bias:
in short: the argument of past growth, young teens becoming rich, for instance the classic argument is to show a graph that starts in 2011 and to note the extraordinary growth of the Bitcoin price.
But this is a true cognitive bias, because it only answers the question "should I have invested in Bitcoin 5 years ago?" The answer is obvious  Grin . But it does not matter because you can not go back in time.
Of course everyone love these stories of people becoming rich from nothing, rather than long articles, books about the technology, potential regulations, or to assess your own risk tolerance. The issue with the narrative bias is that it's easy to tell a story to explain why Bitcoin went up, but in the end this will not help you to predict the future.

2- "Inverted stupidity" is not intelligence
It is not because a person is dumb, and maintains a position, that this position is necessarily wrong.
Otherwise it would be very simple to make money, find someone really stupid and do the opposite of what he does.
So the fact that there seems to be a lot of people investing in bitcoin without understanding the technology behind does not mean that bitcoin has no future.
Similarly, it is not because a person is intelligent (Bill Gates for example) that this person cannot be wrong.

3 absurdity bias:
This bias is when an idea seems to you too absurd and you reject it immediately without really looking to know more about it. This bias is actually useful in life because it helps you to save time (you do not want to waste your time to investigate about the latest pills that will make you lose 10 pounds in 1 month, or this new drug that will make you a bigger  penis!...  Kiss )
.... but the issue is: many ideas that seemed absurd at first have came reality since, in the most epic ways! (aviation, computer, the Internet!)

4. Reasoning by analogy.
When you face something new (the blockchain), you will look for an analogy to understand.
The risk is not to look for an analogy, but to find a bad analogy.
For example, for bitcoin, the most typical analogy is to say that it is a virtual currency. The media are even worse because they often display that gold coin with the sign BTC on it. Right... but if you say that bitcoin is a currency, you will necessarily ask yourself "what can I buy with it?", and the answer is unfortunately "today, really not much", or anyway not much that the average Joe would like to buy on a daily basis (food, cinema, restaurant, etc).
So with the analogy of "virtual money" we realize that bitcoin is not really a currency, and that the current price of bitcoin is carried by speculation...

Hence another analogy, typically the tulip crisis in the Netherlands, or the Internet bubble.
So the possible mistake here is to make sure you've chosen the right analogy: the tulip or Amazon? What analogy is the most accurate?

5- The endowment effect.
Holding something ties you to this something. In the case of Bitcoin, this principle combines with another cognitive bias: Historical earnings: if you've had Bitcoin for a long time now, you have already earned a lot of money, so you are VERY addicted to it (don't lie guys  Tongue ), which can blur your vision of the future. It is even worse if you have convinced friends to buy Bitcoin, it is dangerous because it can become a major psychology weakness (we often see it in politics).

6- irrecoverable opportunity costs.
This one is terrible and I recognize myself very much in it. If you heard about Bitcoin 5 years ago but you did not buy, you might feel bitter, I mean its unfair that my neighbor bought Bitcoin at $100 and I got mine at $3000... And the conclusion that many people draw: Bitcoin is too expensive right now, after all it was 40 times cheaper a few years ago so why bother now? So much that you can even (secretly) hope that everyone who bought a bitcoin before you go bankrupt because Bitcoin will obviously collapse!
It is silly because the world does not care if your decisions are right or those of your neighbor are wrong...

7- Ambiguity aversion.
As the future of Bitcoin still remains very vague, we like to write different scenarios:
- governments will regulate and destroy Bitcoin
- Bitcoin will become a global currency that everyone will use to buy anything
The issue here is that anything is possible, and there is no way to know what will happen with certainty.
Actually the best way is to give probabilities to each scenario and to estimate if the risk is worth it.
For example: Bitcoin has a 75% chance of failing, but I can expect a gain of 1000%, so in that case I should buy! (same logic as sports betting, punters / handicappers know that very well).

I personally recognize myself very well in biases 1, 5 and 6.

Don't hesitate to share your vision about this.

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August 24, 2018, 05:34:34 PM

That's a great list. I'm not sure about #4 though. A model is very useful. It becomes a problem is when it is inappropriate or poorly applied, or when it becomes a rule-of-thumb.

Also, what about FOMO? What bias would that be?
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August 27, 2018, 05:36:17 AM

That's a great list. I'm not sure about #4 though. A model is very useful. It becomes a problem is when it is inappropriate or poorly applied, or when it becomes a rule-of-thumb.

Also, what about FOMO? What bias would that be?
I think FOMO is an interesting case, it depends where it comes from exactly. I would tend to believe it can fall into #1 narrative bias (I heard those stories about people getting rich with Bitcoin, I should not miss the train!), or #4 analogy bias (I missed the Internet bubble (Amazon), I don't want to miss out Bitcoin!). One of the most common way of reasoning these days.
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August 30, 2018, 08:34:47 AM

Thank you for starting a great topic. I'm sure that cryptocurrency community shares absolutely the same cognitive biases as followers of other trends, e.g. Apple, xBox.

People are just people and share the same bugs in their brain.

If you want to learn about cognitive tricks, read this website.

You will definitely find a lot about why you buy what you buy.

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