In this article, you will learn what is cognitive bias. Cryptocurrency is a thing of the future. Even so, there's only a small part of the population that's invested in it. And an even smaller number of people that actually use cryptocurrencies, as there are few places that accept them as a method of payment. So, if you are trying to invest in cryptocurrency, you will need to have a proper sense of technical and financial skills. Moreover, the effect of biasing and the nature of our brain sometimes causes our decisions wrong.
What is Cognitive Bias?
A cognitive bias is a systematic error in thinking that occurs when people are processing and interpreting information in the world around them and affects the decisions and judgments that they make.
The brain's lazy. It likes to conserve energy and find shortcuts whenever possible. And, sometimes, that leads to oversimplifying information to the point where it's wrong. This leads to cognitive biases. Cognitive biases are judgments we form and beliefs based on our experience than objective evidence. These biases can lead us to make bad decisions, especially when trading in financial markets.
To become a better trader, you have to think more logically. Understanding what cognitive biases are and overcoming them is one of the easiest ways to improve your performance. There are hundreds of cognitive biases out there.
What Are the Four Biggest Cognitive Bias in Crypto Trading?
-The action bias
The action bias describes our preference for taking action over inaction. It's the feeling that you always have to do something.
I used to play a lot of poker. One common leak is the feeling that you must play every single hand. Maybe it's boredom or people want the dopamine hits. Sometimes the best thing to do is to wait until you have a better starting hand.
That's how I feel now about the bear market. It's a more challenging market to trade in, and it can sometimes feel like player vs. player. Instead of trying to trade with so many headwinds against you, try waiting. You might be better off leveling up your skills and waiting for a better macro environment.
-The anchor bias
The anchor bias describes how you over-rely on the first piece of information you see. All decisions are silently “anchored” to the first point. This is a commonly used strategy in the world of fashion. The shirt starts off at $100. a few months later it goes on “sale” for $50.
It feels like you're getting a good deal because you're comparing it to the $100 price tag. Would you feel like you were getting a good deal if you knew the shirt cost $5 to make?
The anchor bias occurs in crypto all the time.
- Confirmation bias
We all want to be right. Confirmation bias is the tendency to seek out information that agrees with it. You keep reinforcing what you already believe. This is the most dangerous bias of all.
-The sunk cost bias
When people spend a lot of effort on something (including money), they won't back down even if it goes wrong. We tend to overcommit because we're scared of losing the original investment and selling it is kinda admitting that you were wrong . Don't throw good money after the bad. If you're down 70% on a token, you still have 30% left. It might be worth salvaging the last 30% instead of seeing it go down further.
Just because you spent time or money doing something doesn't mean you should keep doing it.
Bottom Line
There are more cognitive biases and psychological effects in the minds of crypto-traders. Here are the biggest one and this article is about what is cognitive bias.
