Welcome to the second post in my Behavioral Cryptos series. For those of you who missed the first post, be sure to check it out!
This post is gonna be short and sweet, but nonetheless important; we are going to learn about confirmation bias and how it can lead to devastating losses. By avoiding those potential losses, you are going to boost your overall returns and increase your profits.
In short, confirmation bias is you giving more weight to facts that align with your preconceived ideas. What this means is that instead of looking at information impartially and noting red flags and green flags with equal importance, you will tend to notice those which agree with your original idea more.
What makes this concept even more important to understand for crypto relative to traditional types of investments is that there is a lot of hype being built around the various coins out there. The purpose of the hype is exactly to make you want to put your money into a specific coin. If you believe the hype and then go conduct your due diligence, you are at risk of falling prey to confirmation bias.
Let's look at an example
You just read some discussions on Reddit about a new coin, SuperDuperCoin, and you instantly get the feeling that it is, well, super duper. Before putting your cash in SuperDuperCoin, you go ahead and start conducting some research. You start conducting some research, but deep down you already know that you want to invest in SDCoin so you look for positive information and, sure enough, you find some. Not only that, but the coin has been doing good recently. Fantastic, time to make some monayyyyyy! And then, a few days later, the price is dropping and you are left wondering how that could be. You go back to do some more digging, and boom! Red flags everywhere! How could you have possibly missed them? Easy – you were looking for reasons to buy, not for red flags.
So, how do you avoid it?
Being aware of it is probably the most important step. Once you are aware of it, you can take the necessary steps to make sure you approach your research impartially and look for both positive and negative facts with the same rigor. If the coin still looks attractive after considering the pros and cons with equal importance, then you've got a winner =)
That's it for today! I hope you guys found this informative and hopefully it will help prevent some of you from making mistakes in the future! Please upvote and comment if you enjoyed the post, and be sure to Resteem if you think this might have some value for your followers as well. Thanks for reading!