Psychology in Crypto
Psychology is one of the most defining characteristics in all people. How the brain works, how it functions and especially how it affects behavior in people, depending on the context of the situation, are all parts of what makes us, us. The Psychology behind the way we think affects our decisions heavily, especially in regards to investment and all things financial. Our brains are tailored, through Cognitive Bias, to operate at a high level when it comes to making decisions and judgements in our everyday lives. This happens so much, we don’t even know we are doing it.
“We already know that D1rty, it’s called EMOTIONS, HODL, Buy the Dip, etc.”
Yes, emotions can play a big part in how we think, but what about how we look at things? What about how our brain can play tricks on us? As a new writer here, I wanted to delve into something a bit different which affects us all in our day to day lives and pertains, especially, to Cryptocurrency. A lot of the Crypto world (and our world as a whole) is specifically tailored to get you to do certain things through tailored mechanisms, whether generated by our own brains or other people. I intend to bring you the various facets of the psychology of investment and Crypto in this multi part series.
My hope that you gain something and, most importantly, learn from the various topics.
Let’s get into it, shall we?
Our first cognitive bias we’ll be covering is the “The framing effect”. The framing effect, in a nutshell, is the way people react depending on how a piece of information, news article, blog post, tweet, etc., is presented. This cognitive bias affects the end user most in terms of gains and losses.
The framing effect, found by psychologists Daniel Kahneman and Amos Tversky, shows that choices involving gains are risk averse (reluctant to take risks), and choices involving loss are risk seeking (eager to take risks).
Let’s take two investors, CryptoBrit and CryptoDave. They both made the same investment into Ethereum. Over the course of one week, the Global MarketCap rises 20% but the Ethereum investment only rises by 8%. CryptoBrit cares only about the investment return and frames this as a gain of 8% in her brain. CryptoDave however has other ideas in his Crypto addled brain. He compares the investment gain in Ethereum against the Global MarketCap and frames this as a loss of 12% overall.
At this point, which investor is more likely to be happiest with their investment? Let’s see how the gains and losses affect our two investor’s next decisions.
CryptoFrog tweets at them and says “Wutup fam? I got this great ICO that I think will moon hard. It’s finna rain lambos on yo face piece. Ya’ll down?”
CryptoBrit reads the tweet over and decides to investigate further. CryptoDave, stuck in his loss frame perspective is willing to take a risk and dumps out some Ethereum for this ICO without doing his due diligence. In fact, half his investment into Ethereum goes into this ICO. CryptoBrit, happy with her gains, is more cautious and decides to bow out. Well that ICO CryptoDave invested in was Prodeum and CryptoDave lost half of his initial Ethereum investment and was left with the word “penis” on the company website to remember the burn by.
That sort of thinking runs rampant with the framing effect, we see it left and right in the Crypto world. Let’s take a look at another example of the framing effect:
CryptoChuck buys 100 Bitcoin for $504.07 in August of 2014 (a $50,407 investment). Today, his Bitcoin is worth $802,520. That’s a $752,113 gain! However, CryptoChuck actually views this as a $1,100,643 loss, how you may ask? Well CryptoChuck looked at what he COULD’VE sold his bitcoin for, at its height in December, and saw the difference (minus his initial investment) as a loss.
How about another example?
A few days ago, I tweeted a poll on twitter (shown below).
Out of the 26 votes, 77% chose the “80% lean ground beef”, and only 23% chose the “20% Fat ground beef”. The funny part about this? They are both one in the same. It’s more about how the question is presented than anything else.
We can also pose a similar question in regards to pricing in Crypto.
Which sounds more appealing?
“The ProExodusium project has reached 60% of its targeted transaction rate in its Testnet.”
“The ProExodusium project has failed by 40% of its targeted transaction rate in its Testnet.”
Statistically, most people would choose option A because of the way the data is described. In reality, the numbers are still the same and the data has not changed. As an investor, I don’t want to invest into anything that has a 40% failure at the stage of its current Testnet. As a data conscious investor, I should always be looking at both sides of the presented information (even if one side isn’t presented at all). Granted, there are also a ton of other factors that go into investing in ICOs, but what we are showing here is how the information is delivered and tailored.
Here’s another example of the framing effect:
“Ripple is a great currency to buy, because the data is centralized. This promotes adoption of Blockchain and catapults us into the forefront of business.”
“Ripple is a horrible currency to buy, because the data is centralized. This is against Satoshi’s vision and will ruin us all in the long run.”
“EOS has raised $2 Billion so far in its ICO. This is great because the project is going to receive the appropriate funding it needs when the Mainnet.”
“EOS has raised $2 Billion so far in its ICO. This is horrible because the project has received all this funding and hasn’t even launched its Mainnet.”
Notice in both examples, the actual data is the same. ‘Ripple is centralized’ and ‘EOS has raised $2 Billion. The project has not yet launched a Mainnet’. The way it’s tailored however, affects the reader’s perspective when making a decision about a certain project.
Some of you might be saying at this point: Okay d1rty, I see your point, what do I do about it?
Here’s what you can do to combat the framing effect:
- Always follow a goal-based investment approach. Use the discipline of a well written plan and stick to your strategy.
- Try a technique called “reversal”. Re-read the article you just read from the other perspective (as if you were totally against this project/ICO/coin/etc.) Did you find anything different?
- Stay open minded to radical changes in the Crypto space with hot new products and investment opportunities but be weary of the source of the information. Do they seem overtly positive about the currency? Are they being paid for the review? Are they using positive framing effects (see: ProExodusium/Ripple/EOS examples)?
- When presented with data, always look at it from different angles. It’s okay to question.
- People who seem overtly emotional about a project or coin are generally shilling it in such a way. Stay away from emotional shill jobs and research the actual data, not the words.
- Try reframing your perspective on loss by forgetting about the past. For example: The money you may have made at the height of the December market boom is gone, don’t consider it with future decisions.
- Try getting an “outside view” on the investment proposal. Talk to other investors and see how they have fared, over a certain period of time, and pace yourself as to where you are and where you should be.
The moral of the story here is that in a social media/internet driven environment such as this one, investors should never fully rely on the packaging of blogs/articles/news posts/social media posts/etc. to get the full scope of what is going on with Crypto as a project, or as a whole.
Get at me on Twitter @d1rtydan