Bitcoin: Understanding Our Irrational Tendencies

• This opinion editorial discusses the role of behavioral economics when it comes to Bitcoin.
• It examines common “traps” such as FOMO, loss aversion and groupthink which can influence investment decisions.
• The article also looks at how recency bias and the peak-end rule can contribute to volatility in the Bitcoin market.

Behavioral Economics & Bitcoin

The field of behavioral economics has long been used to explain our irrational tendencies as consumers and investors. When it comes to Bitcoin and cryptocurrency in general, these influences become even more powerful due to emotions, biases, heuristics and social pressure that shape our preferences, beliefs and behaviors.

Common Traps

Investing in anything is prone to “traps” such as fear of missing out (FOMO), loss aversion, groupthink (the bandwagon effect) and the sunk-cost fallacy – all of which contribute to people holding onto their investments longer than they should.

Recency Bias

Recency bias may also help explain much of the gyrations seen in the Bitcoin ecosystem. With major advances, disruptions and events occurring frequently, this tendency for people to assume recent events will repeat themselves contributes significantly to volatility. Additionally, with a 24-hour market access amplifying this effect further through the peak-end rule – which states that intense positive or negative events are remembered most heavily – investors are subject even more so to undue influence on future decisions.

Fear Of Getting In (FOGI)

Newer technologies often face resistance from those who must make a “technological leap of faith” before engaging with them – a phenomenon known as Fear Of Getting In (FOGI). As such, understanding this hesitation is important for those looking towards participating in crypto assets but may not be sure where or how to start doing so.

Conclusion

Behavioral finance theories have interesting parallels with concepts related to Bitcoin. Understanding these traps, biases and effects can help investors make informed decisions regarding their participation in an asset class that is still relatively new yet rapidly growing worldwide each day!