Heuristics series: Crypto and the central role of Confirmation bias

Today I would like to take some time to discuss a very important bias in the crypto world. As the crypto scene is still in it's early stages and it's relatively easy to earn money, there are many new investors rushing in. Often, the new investors are inexperienced and unsophisticated which makes them prone to errors in the decision-making process. The results of those errors are often visible in the price behaviour of coins.

What is a confirmation bias?
It's the tendency to subconsciously give more weight to evidence confirming one's own pre-existing beliefs. It makes people interpret ambiguous evidence as a confirmation for their own beliefs.
There are many everyday examples. One of them is sticking to a single news source, or only to news sources from one side of the political spectrum. You read only the information which confirms what you think, thus giving the false impression of always “being right”. We had the opportunity observe in real-time the devastating effects it can have during the recent USA presidential elections and the divide in society it caused. People tend to associate with groups or news which sit well with them, thus creating an echo chamber and giving a false sense of being objectively informed.

“Never stick your head in the echo chamber for too long.”

The path to objective knowledge will never be pleasant since you have to take ideas from the opposing spectrum into account and not only listen to them, but also thoughtfully analyse. By opening up to opposing opinions, we sharpen our critical thinking, and start seeing the world in shades of grey, instead of black and white. Not only is that the proper path to self-improvement but also a way to a more open and accepting society, which is something the world desperately needs today.

What does confirmation bias have to do with crypto?
If you think of forums or subreddits of different coins, you can now clearly see it’s a perfect example of an echo chamber. The fundamental idea of a forum is, of course, valid. Like-minded people gather to discuss a certain crypto or technology of common interest. There’s nothing wrong with that. But often, people get caught up in meaningless price predictions, discussions about lambos and bashing other coins, etc. Why does a cause which should be applauded always turn into a troll internet “bar brawl”?

Because people, due to the confirmation bias, hate to hear opposing ideas or opinions which throw a different light on the future of an asset, or in this case, a coin. Although spreading FUD is a phenomenon which definitely exists in the crypto world, very often people who shout “FUD” do it just to stop the discussion from developing in a direction they are not comfortable with. Very often there are genuine, thoughtful and rational opposing opinions which get buried down by senseless FUD accusations and memeing/trolling.

People love to feel good about their future (especially when it concerns their money), and more than that, they like to feel that there are large groups of people who feel the same. It reconfirms their own opinion, it gives a sense of security. By giving in to the echo chamber of crypto, people are unaware of blind spots certain projects have, because opposing opinions which point them out are extinguished immediately.

When a large enough echo chamber is created, we can see massive positive hysteria which usually results in completely irrational behaviour. The most recent example is the ChainCoin pump and dump scam (you can read the whole storyline here). It’s a perfect example of a mass scale confirmation bias in action, unfortunately, with tragic financial consequences for the investors.

“Every project has a blind spot.”

How to deal with our own confirmation bias?
Obviously, confirmation bias can’t be controlled since it’s subconscious, but we can take precautions and preventive measurements. Only one measurement, to be precise. Never, ever blindly believe that the coin you are investing in is predetermined to succeed, no matter how many people think the same. Every project has a blind spot, even if it succeeds. By being aware of the blind spots, the developers can take measures to fix it, and the investors can value their investment more objectively. By being aware of the uncertainty of your crypto-investment you can be less emotional and not respond to the whims of the market.

“Striving to be objective is the only remedy for confirmation bias.”

I suppose this is the background behind the common saying in crypto: “Never trust strangers on the internet, never invest more than you can afford to lose and always do your due diligence.”