The 'Fear Of Missing Out' on a big win, "but since it keeps rising I feel it would be stupid not to join in." An anxiety that an exciting or interesting event may currently be happening elsewhere, often aroused by posts seen on social media. A pervasive apprehension that others might be having rewarding experiences from which one is absent, the desire to stay continually connected with what others are doing.
Behavioral biases play a big part in trading. Even more so if the asset traded is super volatile. Biases affect how you enter and exit the market, how much time you spend (and waste) monitoring, "managing" and succeeding in your efforts. Biases are also among the general masses, driven by media as partially outline in my previous article. Your trading performance might improve if you are aware what is working against, what feelings you experience, and what outside influences you exposed to. To be objective and rational in decision making is not an easy task.
A list of cognitive biases (trading related) for your information:
Martingale theory is characterized by continuously doubling up on a bet when you lose – lose > double your bet; lose again > double your bet again. Martingale has its roots with French gamblers since the 18th century. The premise here is that those who lose regularly can’t lose all the time – statistically it’s impossible. Risky, irrational approach to manage loses. Instead try to … well that's in my consultancy > moonwhale.io
Hot Hand Bias
Your hand is ‘hot’ or ‘cold’ > really!? Well, perhaps form a karma, higher-power, (un)lucky person point of view. The idea is that because a person have won several times in a row, they’ll win next time also. A built-in cognitive bias and a misguided view of chance under most conditions (a so-called ‘winning streak' may precipitates disaster). Previous successful outcomes (in trading/ gambling) do not influence longer term performance.
Monte Carlo Fallacy Bias
This gambler fallacy, is the idea that odds will even out and can be exploited under normal conditions. On the example of a roulette ball, landing consecutively several times on red, now – very soon – the roulette ball must land on black. Per se, a roulette has no memory. The spin of the ball has no connection with previous spins of a roulette wheel.
The IKEA Effect
This bias explains the tendency for people to place a disproportionately high value on objects (win, opportunity they found themselves) that they partially created themselves, regardless of the quality of the end result.
Reactive Devaluation When we reject proposals (that are potentially favorable to us) just because they come from another party, opponent or rival. Nicely exploited in the book Influence, the art of persuasion.
Observer Expectancy Effect
When a researcher or information anticipates a certain result, therefore unconsciously manipulates an experiment or misinterprets data in order to find it. For trader, being influenced by "research" or "experts" on certain market movements or unique investment opportunities.
Seeing patterns where none. An expectation of probability or some illusion of control. A clustering bias means it’s probable that to extend a winning streak you should keep to an existing strategy. It rejects, to a greater or lesser extent, variability or chance.
Sunk Cost Effect
The tendency to throw good money after bad. A bias that can lead us to continue investing into a project based on our earlier decisions, rather than on its current objective merits or fundamentals. Even worse, despite new evidence suggesting that the decision was probably wrong, humans tend to irrational escalation (of commitment).
House Money Effect
The tendency to take on greater risks when investing with profits. A successful outcome from a recent trade or “playing with the house’s money” leads to a temporary reduction in the investor’s risk tolerance.
Ambiguity Effect Bias
The preference towards the known, probability of something familiar, over a second choice where the risk is less well known. Form investing perspective, you might have a choice of solid government bonds where the interest rates are guaranteed in advance, or the chance to invest in crypto with less certainty – but a reasonable probability of a better return over time. You possess known information about the bonds versus an absence of information about crypto. Fundamental research of all option considered, or consulting will help to make better investment decision ... well that's through my consultancy > moonwhale.io
Herd Instinct Bias
Herding instinct is particularly apparent in trading and investing. Mass-media can indeed influences the masses towards specific behaviour, FOMO-in or FUD-away (create Fear, Uncertainty and Doubt). Media headlines in the business pages might talk of promising new markets or technology, but might as well be fake-news. Especially in crypto, 'whales' foremost control the market, and eventually create news to steer it in their favor. 'The time to get interested is when no one else is.' Warren Buffett
The fear of selling too early or too late, the anxiety of possible losses. The disposition bias applies to multiple assets and commodities, from shares to vintage cars or property. Dangerous, if you refuse to sell a poorly performing asset, because you prefer to wait for it to 'come back', often driven by pride and ego. Instead, perhaps consider to sell and buy-back as a strategy before blindly "hodling".
Ignoring or filtering-out everything that doesn’t square with your beliefs or doesn't fit your prejudices. 'Despite the facts', one decides to do the contrary, ignoring inconvenient information. To resist it helps to case different perspective, angels, consider a few that contradicts our own.
Recency Trading Bias
This is when you only focus on recent trading decisions, or the most recent outcomes, be they successful or not. Abandoning logic and a solid trading strategy or technical analysis, because you’re running on emotion, you're only focusing on most recent trading decisions, or the most recent outcomes. Instead, approach every trade as a fresh one, collect new information, an unbiased few. Perhaps record and review your previous trading results to remind you of the long-term foundations.
Over-simplifying, through the fog of memory, often means certain events loom larger in the mind than they did at the time. Over-confidence, ascribing cause-and-effect reasoning 'that the event was completely predictable'.
Over-emphasise the cost for a trade. For example, you buy a coin for $0.10, and (of course) it drops by 20% the second after you pressed 'buy'. Instead of absorbing the loss, you hang in there hoping for recovery, because you haven’t got 100% of your money back.
By not paying attention to all possibilities and options, a selective attention, often only observing assets that feel familiar instead of the overall market, or related assets. Hence, eventually you make decisions at the expense of alternatives that might perform better. This is a cost of trading, the time spend starring at the screen, but still missing out.
Neglecting Probability Bias
This is like worrying about the risk of death via plane flights compare to train-travels, but ignoring general health risks visiting fast food outlets daily. In trading, probability neglect might be a failure to assess a stock in a qualitative way, the fundamentals. There are many criteria to consider before choosing a crypto to trade/ invest in. Important selection-criteria in crypto trading are ... well that's in my consultancy > moonwhale.io
Group-think can distort reality. This bias discriminates against other options. It can weaken your judgement about a wider reality. Same as in businesses, 'a fresh eye' may opens up new unseen considerations and opportunities.
Post-Purchase Rationalization Bias
Justifying consumer product you’ve bought it, even if it turns out bad. Also called Choice-Supportive Bias is unacceptance of a poor trade since it was our own choice and decision. We may strongly remember aspects of the decision-making process when placing the 'buy-order' and our judgement for different possible outcomes at that time was distorted. The rational decision making in that past, plays a role in future, which may be ill advised. Stay honest about why you bought, that it turned out to be a disappointment, and learn from it.
Focusing only on those that have passed some form of test, means you risk your investment choices and potentially repeating failures you had previously ignored or which were previously not visible. It distorts your wider field of choice. The tendency to view an existing asset, a fund or company's performance in the market as a representative comprehensive sample. Existing assets, companies or stock in the investment market are simply more visible but do not always represent a sufficient sample. This bias can skew a broader investment valuation and decision.
Out-of-date or incomplete information might create deteriorating trading judgements, since proper randomization is not achieved. Always trade on systems that are well known, transparent, robust and that absorb as many legitimate information channels as possible. Influences by fake-news, influencer marketing and often incomplete information, especially the crypto-market is flooded with potentially bad choices. luring with fancy keywords and 'whistles n bells'. Proper due diligence is always necessary in a market with over 2000 crypto-assets, over 300 trading exchanges and hundreds of investment offerings.
When the decision-making process is deferred to automated systems, usually highly accurate, easily be seen as infallible. Lowering costs and improving liquidity, this automation provides many advantages. Don't be fooled, noting is guaranteed in investing or trading. And those who claim it, you have to worry most.
Availability Cascade Bias
A personally felt right decision-making form the past. 'You were there before', adds power and intensity to your trading decisions, perhaps blinds from facts and validation. Remember markets are cyclical and general asset fundamentals, they real value, to keep your decisions straight.
Blind Spot Bias
Are you are able to overcome your own biases any better or worse than those who have more self-awareness? Can you take independent advice, or discriminate your trading portfolio? Your trading decisions essentially tell you, that other people’s decisions is biased, pursuing the opposite. Every buyer must have a seller.
Endowment Effect Bias
We may place too much value on a trade or asset we already own, hence it is easier to justify i.e.. buying more. Longer term this can reduce the potential value of your investments, and clearly lead to missing out on potential better opportunities. To avoid this simple but common bias … well call my consultancy > moonwhale.io
Attribute Substitution Bias
Short cuts and too quick decisions, often based on incomplete information. A trader might buy an asset without giving enough thought to its fundamentals and other selection criteria. A natural process that should be controlled when gambling/ trading/ investing.
Opinion from peers, information from the internet, general sentiment, or prices we see in the high street. These valuations can be manipulative or misleading. Better judgements are made on basic market or trading fundamentals. Be aware of perception and try to objectively validate a trade or investment. Reframing, look through a different lens, angle, perspective and reevaluate.
Backfire Effect Bias
When some aspect of your core beliefs is challenged, it can cause you to believe even more strongly. Same happens to another person you might ask for advise. This may lead to even more irresponsible actions or decisions. Try to keeping emotion out of an argument and decision-making.
Contrast Effect Bias
Decisions based on past experience. For example, we might be looking at buying crypto-assets from XYZ project, following positive regulatory news for that project. However, we may then see a cheaper trading opportunity for a different company, which also expects positive regulatory news, which hasn’t materialized. Being tempted to trade at discount, even-though the regulatory value isn’t confirmed, because it still looks like a great value in comparison.
Bandwagon Effect Bias
When market valuations soar on herd-like demand at the expense of basic, sensible valuation metrics and objective research, can lead to ill trading and investment decisions. Common in the crypto-space, driven by media, influencers, experts. Not to fall for the 'but everyone is doin it' investment bubbles ... contact my consultancy > moonwhale.io
Loss Aversion Bias
Cut your losses and sell … or not. Rooted in the hope of a turnaround, this bias can, potentially, be dangerous as it limits the chance to move on to the next opportunity.
A tendency to assume that specific conditions are more probable than general ones. We regularly violate the laws of probability due to a vivid story.
Overestimating the significance of what you think may happen in the future. Your decision-making may be influenced by potential future market trends or market cycles, then adjusting your trading strategy, instead of accepting that periodic changes and flow of the market is natural.
Status Quo Trading Bias
The reluctance to change your mind about an established gain or loss reference point, even when presented with contrarian proof and facts. Status quo bias can be dangerous as it does not allow you to respond flexibly to change. It applies in all areas of life and business.
Deformation Professionnelle Bias
The tendency to examine your exterior environment via your professional capacity at the expense of a more balanced view. 'Profession distorts perspective' - you only see through your own lens, resulting in potentially poor trading and investment decisions.
The lack of ability to take on new ideas, or to respond promptly to events, or signals with which you have little experience. The inclination to only plan ahead for what you think may happen, as opposed to what could happen.
Reversion to the Mean Bias
Returns are likely to be more reliable over the long-term than the short-term. However, not all assets revert to the mean, they behave beyond regular patterns. Especially in the young crypto asset class with higher volatility, different fundamentals, blurred trading reasonings, and new breed of trader involved, traditional concepts may not apply, as explained in my previous article.
Omission Cognitive Bias
Not acting or responding to an event is better than responding … an impulse is to steer clear of a decisive action, choses our potential profitable trades or investments. Omission bias can be connected to moral choices.
Focusing Effect Bias
The expectations of future performance based on past events, your own experience, and a simplistic cause-effect thinking. Accept there is a very wide range of factors generally determines most outcomes. Look at the macro picture, be a contrarian often help
Ego. A poor performance in taking responsibility when things go wrong. This bias is also wide of the mark when things go right. It is especially worrying in trading, because it can lead to over-confidence. Involving my advisory will give you an objective and different viewpoint on trading and investment opportunities > moonwhale.io
Current Moment Bias
In trading: the temptation to take profits too soon because you want to enjoy the spoils. Or to chase the next best thing. It also has a maturity element: why worry about the future when you could enjoy now, with roots in hunger and gratification.
Frequency Illusion Bias
Repeating, instilling by outside factors, media or persons, include supplied heightened subliminal reassurance; unconsciously you were watching for that same name, or trade opportunity, even when you knew little of value about it. This bias can be falsely attributed to intuition. Frequency Illusion bias is also known as the Baader-Meinhof bias.
Affect Heuristic Bias
The emotional state affects your (trading) decision-making. If you’re in a positive frame of mind, you’re more likely to respond positively and quickly to, say, a certain stock market trade. It’s a reasoning cognitive bias that supports quick decision-making. Additionally driver is familiarity, that can attract a more quick and positive response to a stock or coin.
Negativity Trading Bias
The glass is half empty or half full? This bias tends to slide towards a negative outcome rather than a positive. Negativity basis is good in the sense that it can make you cautious. It’s not so healthy when it blunts your own sense of potential or skews your judgement.
Decoy Effect Bias
An overload of investment options or too many choices of products, resulting in rushed, poor-researched decision making. Fueled by previous experience, media impressions and/or price pressure applied.
Regret Theory Bias
Are you worried about / feeling emotional about a possible trading loss for which you might be responsible? Does that make you hold onto a losing stock longer than you should? High levels of risk-averse behavior, resulting in avoiding stocks and trades, and sticking to the secure, low-risk only.
Risk management anyone? Overconfidence on difficult issues and under confidence on easier ones. Instead, apply systematic decision-making process.
Conservatism Cognitive Bias
Being slow to respond to new data or events, compromising your judgement, holding on to your beliefs instead. ‘Belief perseverance’ when facing complex information situations where there’s an expectation on you to absorb new information and to make adjustments. Similar to the 'Affect Heuristic Bias'.
Mental Accounting Bias
Right (or wrong) risk attitude. This is a reasoning ability to manage your spending behavior, a logical perseverance of assets while investing/ trading. It has links to the Hyperbolic Discounting Bias.
Hyperbolic Discounting Bias
We accept a smaller reward now rather than the bigger prize later. It’s a form of bias that goes against common sense and logic, craving for gratification rather than the bigger long-term reward. This is often observed in day-trading and shorting compared with the saving-for-the-future trudge.
Duration Neglect Bias
For humans, painful (exiting, sad, happy, basically any strong emotions too) experiences resonate more powerfully, regardless of the actual length it happened. How the experience was judged at its most intense moment, rather than the overall effect or loss.
Law of Small Numbers Bias
Do not draw conclusions from small amounts of data randomly collected. In general, a too 'small sample size' can not reliably display random patterns or clusters, undermining the integrity of the result. In trading (in life) often a lazy shortcut used for seeking coherence where none may exist.
Theory-Induced Blindness Bias
Explain it away: wrong judgement with a trade > I couldn’t control or > I didn’t realize X was a bigger issue than it was or > > or or. To avoid this in-theory-thinking and 'having-an-answer-to-everything, even you made a wrong move, you should consult a 3rd party like my consultancy > moonwhale.io
The lack of focus and self-control. If you think you can rein yourself in, and avoid loosing trades … you still fail, due to overestimation of your ability to control impulsive behavior.
Are you able to resist the crypto-market if you hear 10x gains or Bitcoin again moving to 20k (and beyond)? We are not as rational as we might think. You get excited when other get excited about something. Social Proof. When the Herd Instinct and Bandwagon Effect come together. Authority - due to a lack in context or experience, you are inclined to follow someone who has (or acts like they have). Someone who might has made a lot of money with crypto trading.
Inaction Inertia Bias
A state one experiences after missing out on a deal, making you less likely to buy the same product in the future for an increased price, even potential gains are still likely.
A tendency to believe that positive outcomes are more likely to happen for us than negative outcomes. “Everything is going to be fine”.
The Halo Effect
A noble and admirable cause, may not result in a valuable cryptocurrency. The tendency to give a significant and disproportionate amount of attention to the positive attributes of someone or something, and overlook many negative attributes.
Sources: Seeking Alpha, Investopia, HBR, Essentia Analytics, IWS FinTech