Let’s explore the last part of treacherous cognitive biases in trading/investing.
1/ Confirmation Bias: look at your thoughts and stances in various fields, do you have a tendency to only follow one narrative and mindlessly deny other perspectives? Do you dismiss opinions and arguments from people who stand opposite to your position? This kind of inclination would push you towards the fatal confirmation bias where you seek for additional information only from sources that confirm you current bias, holdings or opinions, this can be going to the same twitter accounts, the same news sources, the same thought-leaders, on a recurrent basis looking for confirmations.
Confirmation biases could be technical analysis, lines and channels drawn to confirm your positions, sentiment and analysis confirmations. Crypto news and twitter accounts often merge into one echo-chamber where it becomes difficult to not be influenced – I’d say tricked in some cases-. Keep in mind that respected twitter accounts kept denying that there were any serious concerns or flaws with Anchor & Luna before its crash, these notable accounts has previously promoted and backed great projects that indeed brought gains and riches to some of their followers. Sadly, the followers who blindly listened to the aforementioned twitters have also failed to execute due diligence by searching for alternative and contradicting informational tweets, they were comfortable with their staked Luna in various protocol bringing decent returns, the comfort coupled with the passive income benumbed them and they did not question the stance of their information source. After the Luna collapse, many users have claimed that they lost life savings, retirement money … beware of confirmation in everything, not solely crypto. Remove your rose-colored glasses, look at all perspectives, consider all arguments. Crypto investing and trading is not a fairy tale.
2/ Herd Mentality: also called collective decision-making bias is the phenomenon where you tend to follow the actions of the majority, often without conducting independent analysis. Keep in mind that only a few are winners, some say 10% others would say only 1% wins… Also, keep in mind, that the big winners who bought BTC and ETH early on were not asking their friends about crypto, they did so by pure conviction and were absolutely not buying cryptocurrencies because of a collective trend. This psychological bias that leads market participants to make investment decisions based on the actions of the crowd, rather than on their own research, knowledge, or rational analysis.
When you see yourself going with the mass, pause, assess the collective mentality and ask yourself two questions:
- do you want to buy in because everyone is doing so?
- if you do buy in, are you part of exit liquidity with the herd?
To get rid of this bias and improve your decisions 10x do the following:
- when your uncle and no-coiner friends start telling you that crypto is a scam and is doomed to fail: buy crypto! (Around FTX crash everyone and their dog was calling cryptocurrencies the biggest scam, at that point price was between 18-20 000$, had you bought right after FTX demise you would have doubled your capital.
- when many people who have never dealt with crypto start asking about how to buy! When TV (CNN, Fox) broadcast segments and debates about BTC & Crypto: Sell crypto. These are your top signal, don’t buy and if you have crypto start selling.
3/ Loss Aversion: a fantastic writer, Daniel Kahneman, wrote about loss aversion in “Thinking Fast and Slow” and they did not really understand the concept until I felt the excruciating pain of holding on a big loss when I could have closed it earlier with minimum damage to my PNL.
The best example to explain this bias is that you will feel more pain by losing 100$ than by winning a 100$, the distance, the incoherence between both feeling is where the bias comes from.
Loss aversion is a behavioral bias in trading and investing where you tend to feel the pain of losses more intensely than the pleasure from equal gains. Naturally, this bias can stain your decision-making by causing you to avoid realizing losses, even when doing so might be a rational move.
To mitigate the impact of loss aversion, you must adopt a disciplined and rational approach to decision-making with clear risk management rules, using stop-loss orders, and regularly reassessing your investment thesis can help you overcome the emotional biases associated with taking a loss on a position… DO NOT MARRY YOUR POSITIONS/CRYPTO. The graveyard of once rich and successful traders is filled with the ones who could have saved their wealth by accepting a 5-10% loss in a specific position.
4/ Representativeness Heuristic: crypto projects marketers know how to play this, slapping a trendy keyword will make you more optimistic regarding the project, you are judging by appearance. From 2020 to 2022, any project that markets itself with the term ‘L2’ in its name but doesn’t even have a working blockchain was able to go in the 7 to 8 digits in market valuation.
Today, it is all projects slapping AI or even GPT in their name, many uninformed and uninitiated noobs will thus buy in worthless projects in the coming months and years.
Always dig deeper, read white papers, thought and analysis articles, reddit posts and evaluate multiple criteria: compare TVL, ecosystem, audience, potential, and tokenomics… Another dog-themed coin won’t reach DOGE’s market cap just because it’s also a meme coin with a dog.
5/ Optimism Bias (Overestimating positive outcomes): you got lucky, its a bull market, you bought right before a bull-rally, you made solid gains. Confident in your intuition you are thinking of quitting your job, you keep holding on a few projects, the bull steam is getting out of breath and you decide to buy in a few new projects, you put a substantial amount. No need to worry, you made great calls a few months before and your portfolio is up 1000%… nothing can happen? Right ? Right….!!!! You wake up a morning, SEC announced a new regulation crack-down, your portfolio is down 900% and you go rug-pulled in two projects: this is the result of Optimism Bias, you failed to question honestly your abilities, which led to taking higher risks and blew up in the end.
Always question yourself: am I a lucky fool or do I have a real edge?
A lucky fool who is honest with himself will always win and take profits at the right time.
6/ Survivorship Bias: we only hear about the people who succeeded in e-commerce and dropshipping, have you ever spoken to the thousands who lost money on google and Facebook ads with little to no revenue at all? You will always hear about someone turning $1K into $300K trading meme-coins and I bet for every one of them, there are hundred thousands who turned $1K into nothing. People rarely broadcast their failures but the best lessons are learned by listening to those who failed in businesses, trading and investing, the ones who share genuine lessons after the fact.
Cold blooded, calm in a storm of noise(tweets, videos, insta), realistic and diligent you must remain in order to not fall prey and be sold. These lessons will help you, I strongly suggest to anyone taking investment and trading seriously to read the following:
- Fooled by Randomness, Nassim N TALEB
- Thinking Fast and Slow, Amos T & Daniel KAHNEMAN
- Thinking in terms of bets, Annie DUKE.
I write code, articles, and that’s how I behave in real ↓↓↓
