It’s Easier To Hack A Trader’s Mind Than Wallet

In the face of too much (yet too little) information, we turn to mental shortcuts to guide our decision-making. This can be effective and efficient, but many projects and their promoters cater to these heuristics to get undue attention or to distract from their weak points.

Guard your brain like you guard your private keys.

Recognize these mind hacks when you see them so you can see through them. This is not a comprehensive list, but describes some of the more common cognitive biases among traders:

Anchoring

The first decision impacts all the decisions that follow. The price of a particular cryptocurrency at the time of initial sale/offering can impact our view of the current price, even when the initial price was set arbitrarily.

Availability Bias

We focus on price outliers like all-time highs and lows because they stand out and are easy to look up. Often, these data points reflect more about the state of the larger cryptocurrency market, supply dynamics, or marketing at the time than the merits of a project today.

Scarcity Bias

You’ve probably heard some version of “only 1 in X people worldwide will ever own 1” about a cryptocurrency. Limited supply implies rarity, which implies higher value and creates urgency to purchase. But the one-of-a-kind doodle I made earlier, although rare, likely is not worth anything to anyone.

Sunk Cost

We cling to things we have already invested in. “You don’t realize a loss until you sell,” but selling for a low price now is better than selling for a lower price in the future.

Dunning-Kruger Effect

As our knowledge grows, the gaps in it become more apparent. The more we know, the less confident we’re likely to be; the less we know, the more confident we’re likely to be. Community members with a thorough understanding of a project’s fundamentals may be more reserved and deliberative about their expectations, while the relatively uninformed make much bolder predictions.

Groupthink

The loudest, most confident, or first voice to speak up often guides the decisions of the group — but due to Dunning-Kruger Effect, these voices are often the least informed, which can lead to poor decision-making. Objective evaluation and critical thinking should be encouraged within project communities to counter the tyranny of the majority (or loud minority).

Social Proof Bias

We tend to look to others to guide our own behavior. Partnerships, support from influencers, and social media armies can give the appearance of credibility to a project, but this support may be superficial and driven by ulterior motives.