Ignorance of Bias. Our achilles heel.
Investing is an excellent way to save for a pension or achieve financial independence. If done correctly, it alleviates all of life’s concerns, making you feel at ease, content and finically stable. Unfortunately, many investors come with high expectations and leave empty-handed. Usually due to bias. Overcoming them therefore, would be a glorious victory against biology.
What are Biases?
Biases are ingrained in us; they are impediments to success, and overcoming them is a difficult task. Worse, the cognitive bias codex contains 188 of them, and for the majority of us, they guide our thoughts to produce negative outcomes. Furthermore, we’re completely unaware of them.
“Cognitive biases are unconscious errors in thinking that arise from problems related to memory, attention, and other mental mistakes. These biases result from our brain’s efforts to simplify the incredibly complex world in which we live”.
In other words, every time we face a new decision or judgment, our brain is tainted with biases constructed from the past, instead of looking at the new issue with fresh, level-headed, emotionless logic.
The Origins of Bias
Amos Tversky and Daniel Kahneman, Israeli psychologists, coined the term cognitive bias in the 1970s to describe people’s flawed patterns of thinking in response to judgment and decision problems (Tversky & Kahneman, 1974). In fact, in 2002, they were awarded the Nobel Prize in economic sciences for their work.
Bias in Investing
Successful investing isn’t just about the decisions we make but also about the actions we take. Derek Sivers once wittingly said,
“If all it took was knowledge, we’d all be billionaires with six-pack abs.”
When it comes to investing, he couldn’t be more accurate. Knowledge and decisions must be accompanied by action.
Today you’ll read about 3 biases ever-present that affect our investing performance – the status quo, over-optimism, and IKEA bias. Then, I’ll present an accessible, cost-effective solution for avoiding them, allowing you to embark on a new path of incredible investment decisions.
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Status Quo Bias
What exactly is it? Perhaps you bought a car a few years back that is constantly breaking down. The engine won’t start, and the oil is leaking. Repairing these take time and money. But you love your car too much to part with it. New cars are expensive, and replacing what you have feels like a betrayal. You end up doing nothing. However, the simplest calculation shows that it is clearly time for a change.
That’s the status quo in a nutshell: you’d rather stay in your comfort zone than act quickly to turn things around for the better. The status quo bias is an emotional preference to keep things unchanged in perpetuity. It is related to the human trait of loss aversion, in which the perception of one’s loss, believe it or not, outweighs one’s desire for new gains.
By the time you get off the couch, the damage has been done – it’s too late, inflation has reached its peak, forcing you to stick with the car you have. And that’s when anger and regret kick in.
Simplified: The status quo bias is:- you know you should do something, but you don’t.
There is no exception in the crypto market. In fact, it’s a prime example of status quo bias at work. Too often, investors suffer from inaction and postpone portfolio changes until the last possible moment. Have you ever found yourself watching the market fall and doing nothing? After all, Bitcoin has been falling since Nov 2021, so how long did you wait before you got out of the market? Or maybe you still didn’t.
You may say you don’t care, it’ll be $100,000 in ten years. Prices will surely rise again. However, this is the dangerous mindset of many buy and holders in volatile markets. Evidently, from what we have witnessed, this approach brings costly losses and an uncomfortable state of discontent.
Warren Buffet’s teacher, the Father of Value Investing, and author of the Intelligent Investor, Benjamin Graham once said,
“The individual investor should always act as an investor, not as a spectator.”
In other words, it’s important to trade.
But how do you know what, when, and how much to trade?
Who’s helping you with these decisions in order to eliminate the status quo bias? Perhaps a therapist, a friend, but are they really qualified to give crypto advice?
Yep, this one’s a big one. In everyday life, we are constantly confronted with cheerful over-optimism. Consider this: you’re packing for a trip to a remote location, and recently heard bad things about the place. People warned you about the possibility of a flood because it is a common occurrence during the first quarter of the year.
But that’s the period when plane tickets are cheap. So you keep thinking about it, convincing yourself that it’s safe to travel. The flood lasts only a week, which means your chances of getting caught in the middle of it are only 8.3%. After all, your friend was there on the same dates a year before and had a fantastic time. But the probability remains a probability, and… as soon as you arrive, you end up paddling yourself to breakfast…
That’s an example of over-optimistic bias: you believe bad things will not happen to you because you are you.
It is a belief that you are less likely to experience an adverse event. Smokers considering that they are less likely to contract lung cancer than other smokers, are a prime example.
And yet…when you invest in cryptocurrency, you suffer from the same bias. You buy low and hold. You see your investment grow and grow, and just because others are selling for a profit today doesn’t mean you have to too. You believe you can get a larger reward.
You wait and convince yourself that the trend will continue. You become complacent. And that is precisely when the house of cards collapses. You believed that, like the flood, the probability of price collapse was low and was unlikely to affect you in any way. Thank the over-optimistic bias for that.
The smart way to Buy &
Suppose you are working on designing your apartment as you see fit. You do everything with your own hands and as you know. Yet, you are no specialist and make occasional mistakes be it a wrong material or just a bad design solution. Perhaps you paint walls in brown and black, two colors that don’t go well together. But the sense of pride and your own deep personal involvement clouds your judgment, and once some critics arise on the horizon, you vigorously retaliate.
That is bias, known as the IKEA bias – when you do something yourself, you have a stronger sense of self-belief, you attach greater value to it, and when things go wrong, you feel less affected.
This bias instructs your brain to tell yourself a lie to feel better about yourself.
When investing, choosing stocks and making trading decisions is tough. You successfully overcome the status quo bias, make a decision and take action and enter the market. Then they fall. You feel less upset because it was you who made the choice of what to invest, how much, and when.
You put in the decision-making effort. You got off the couch. You put in the time, and you took action. Yet, you barely blame yourself. But if you were to ask your partners, relatives, or friends who was to blame for your losses, who do you think they would say?
Preventative Measures to Avoid These Biases
As you can see, many biases lead to clouded judgment, inaction, and undesirable outcomes. And unless you fully comprehend these biases and how they affect you, they will constantly re-emerge, resurface, and taint your decisions without your knowledge again and again. They thrive and reproduce in our subconscious unless the are detained.
So, at Libertify, we set out to solve this problem for investors. We recognize that, with our day jobs and commitments, we cannot possibly comprehend how to overcome these 188 biases, determine which ones are at work, and eliminate them in real time.
We set out to pave the way for the future of conscious finance. Free of bias and emotion, we built a technological solution to put raw calculative, risk-adjusted, and performance-driven advice at your fingertips, ready for action in a single click.
Perfectly Tailored, Timely Advice
Today anyone can enjoy Libertify. You are eligible to receive risk-adjusted advice actionable in seconds, regardless of the crypto you own or the value of your portfolio. We eliminate the fear, uncertainty, and doubt (FUD) in your own decisions so you’ll never miss out on opportunities again. Say goodbye to indecision, inaction and the resulting emotions of of regret and anger.
All of our recommendations are accompanied by a set of comprehensible explanations detailing why they were provided to you. Each insight describes market conditions relative to your unique risk tolerance. You will always have access to reports detailing the profitability of these decisions. Simply put, you will never be in the dark. The contrary. You’ll learn and grow into a Wall Street pro feeling great about actively trading and winning in the world’s most volatile markets.
Ready for Action
Furthermore, each piece of advice can be manually accepted or rejected, or you can run on autopilot mode. In this mode, you’ll receive a piece of advice at a time you define. You’ll always have 1 hour to stop it. If not, it will execute a trade on your behalf, so you always remain in control.
To eliminate biases and effortlessly trade bias-free, start here.
It’s the best decision you’ll make.