“We can be blind to the obvious, and we are also blind to our blindness.” — Daniel Kahneman from his book, Thinking Fast and Slow
Whether you are a new cryptocurrency investor or a self-declared “crypto-expert,” your decisions on which cryptocurrency to purchase require you to make estimates on the future. However, with whitepapers, “expert” opinions and ratings, increased coverage of cryptocurrency news in mainstream media, and many other things to consider, you are more likely than ever before to make poor decisions that are heavily influenced by cognitive biases.
What Are Cognitive Biases?
One of my favorite definitions of cognitive biases comes from Kendra Cherry, who writes that cognitive biases are “systematic errors in thinking that affect the decisions and judgments that people make.” As Buster Benson points out in his cognitive bias cheat sheet, cognitive biases are most likely to affect your decisions when at least one of four problems exist:
- there is too much information to appropriately weigh and consider,
- the context around the issue is very confusing,
- the decision must be made quickly, and/or
- we have a limited experience with the issue/topic.
In the world of cryptocurrency, unfortunately, nearly all four of these problems are present.
- Mainstream media coverage on cryptocurrencies, particularly Bitcoin, and initial coin offerings (ICOs) has increased significantly over the past year (too much information to weigh and consider).
- The rate of ICOs have increased significantly in the past year alone across many industries. That, along with the lack of regulatory guidance, has created a bit of a Wild West in cryptocurrency investment (the context around the issue is very confusing).
- Startups conducting an ICO often structure their rounds in a way that takes advantage of the fear of missing out among investors, which adds urgency to investment decisions (the decision must be made quickly).
- Meanwhile, ICOs are still a new fundraising method — no older than five years old (we have limited experience with the issue/topic).
Kai Sedgwick recently wrote a searing critique of self-proclaimed crypto-investment experts on Bitcoin.com. While there is plenty of hyperbole and flat-out lying to go around, there is a failure to combat, or even be generally aware of, cognitive biases as they relate to cryptocurrency decisions across the industry — regardless of their “experience” in crypto-investments.
The 7 Deadly Biases
I am an intelligence analyst by trade. Making estimates on the market potential of a given industry or company is very difficult, and its something market intelligence analysts must do everyday. In order to make as accurate an estimate as possible, an intelligence analyst must be aware of cognitive biases.
Cryptocurrency investors are faced with the same difficult tasks and the same deadly biases. While this is not a complete list, here are some of the key cognitive biases that are plaguing the crypto-investment industry.