Blockchain and Cryptocurrency Advanced - 5 Biases that Influences Trading Behaviour

Herd Mentality Bias

In my opinion, this is one of the biases that can be seen from the case study showcasing Leonardo’s behavior on his trade. From the story of Leonardo, we saw that he jumped into a trade based on what was posted on the group. It was posted on the group that members should buy the cryptocurrency and Leonardo decided to follow others to buy as well. This is what is called the Herd Mentality, simply because Leonardo bought the coin because it was posted on the group and other members of the group were buying as well. Leonardo didn’t do his fundamental analysis and technical analysis before picking a coin to buy, but decided to buy because someone posted it in the group and other members were buying. This can be very risky and can lead to heavy losses. If he had carried out his proper fundamental analysis and technical analysis by himself, maybe he would have made profit from the trade or he would have avoided the trade and invested in another coin that would have made him even more profit.

Confirmation Bias

For me, this is also another bias that can be seen from the case study showcasing Leonardo’s behavior on his trade. When we talk of the confirmation bias, it basically means when traders justify their actions or decisions by seeking or cherry-picking things that confirm actions or decisions to feel better. In the case of Leonardo, he was feeling sad that he didn’t buy the coin when it was posted because he would have made more profit. Instead of him selling and enjoying the profit he made already, he was a bit greedy and wished he bought at a lower price. When the price of the coin started falling, it was a confirmation for Leonardo to buy more at a lower price as he wished. He neglected all the bearish signs and neglected his technical analysis, instead he assumed that the price would rise back up and held on to the belief that after the price falls, it will rise back to its previous high prices. Leonardo kept on buying at lower prices as the price kept falling, which eventually saw him lose money.

Self-Attribution Bias

This is also another bias that can be seen from the case study showcasing Leonardo’s behavior on his trade. This type of bias is basically when a trader claims all the success and attributes the success to himself alone without accepting blame for the failure and tries to shift the blame to other things. In the case of Leonardo, instead of him to accept his mistake and learn or accept that he made the wrong decisions in the market by letting his emotions and other biases to influence his trading decisions, he began to blame it on the stoploss and blame the creators of the stoploss concept by saying stoploss is a dump concept because the stoploss triggered after the price fell to that point which made him lose money. Instead of Leonardo to accept that he made the wrong decision and accept the loss, he showed his Self-Attribution Bias by blaming his loss on the stoploss.

Emotional Bias

In my opinion, this is also another bias that can be seen from the case study showcasing Leonardo’s behavior on his trade. This type of bias is basically when a trader allows the emotions or feelings to control the trading decision. In the case of Leonardo, he allowed his emotions to take the better of him in making his decisions which proved to be the wrong decision that made him lose money from the investment. If he didn’t let his emotions take control or influence his decisions, he would have probably sold the coin much earlier when he was in profit and taken profit, instead his feelings wished he bought earlier at a lower price and the feeling of wanting more profit led him to begin to buy at lower prices. Or, he would have just held the coin much longer without setting stop loss. If he didn’t allow his emotions and feeling of fear to lead him to set stop loss, he would have probably made even more profit when the price increased.

Bounded Rationality Bias

This is also another bias that can be seen from the case study showcasing Leonardo’s behavior on his trade. This type of bias is basically when a trader makes certain decision that he sees as good enough or decisions that satisfy a certain rationality, instead of making decisions that are optimal, making the best decision possible, rather the trader makes decisions to satisfy his rationality. In the case of Leonardo, he allowed the bounded rationality bias to affect his trading decisions. His rationality is always to dollar cost average down so that when the price goes higher, he will be in big profit or break-even. While this can be a good decision in many situations, it is not always the right decision because if Leonardo sold his coins earlier when his asset value was high, he would have been in profit. Also, when the price was continuing to fall, he would have just taken very little profit or very little loss and moved on. Instead, he always believed in the idea of keep buying low if the price keeps falling, and that was what led him to a loss.