The heuristics often described in behavioral economics offer insightful frameworks for understanding mainstream resistance to Bitcoin.
This is an opinion editorial by Rich Feldman, marketing executive, author, and advisory board member at Western Connecticut University.
economic conduct It has long been cited to describe our “irrational tendencies” as consumers and investors. I’m here to extend that discussion specifically to Bitcoin because, let’s face it, when it comes to cryptocurrencies in general and Bitcoin in particular, the influence of emotions, biases, heuristics and social pressure in shaping our preferences, beliefs and behaviors is deep… and fascinating
Go beyond FOMO
As preached in behavioral finance, investing in anything is prone to common “traps” such as fear of missing out (FOMO), loss aversion, groupthink (“the bandwagon” effect), and the sunk cost fallacy, which explain why people hold on to their investments more than they should.
Cognitive journeys like these are nicely displayed in the chart below which, ironically, was created by swiss credit. In the light of recent events, maybe I should have been careful about “overreaching bias”. But let’s not kick him while he’s down.
The concepts of behavioral finance and Bitcoin certainly have interesting parallels. For example: FOGI (not the “old” type), or the fear of getting in. Chalk that up to a nascent trading market that can be incredibly confusing and (for many) requires a technological leap of faith.
However, anyone who thinks this is a new The phenomenon need only look at the launch of online banking, bill pay and mobile deposits to know that there is hesitation surrounding every consumer foray into new technologies, particularly as they evolve. As such, FOGI prevents “crypto curious” from making the behavioral moves (aka learning and discovery) required to actually participate in the asset class.
Besides, recency bias it can certainly help explain much of the twist in the Bitcoin ecosystem. With so many breakthroughs, outages, and “hackers” making headlines seemingly every day, it’s no surprise that this irrational tendency to assume the fact that recent events will almost certainly repeat themselves can easily be associated with a volatility that can seem ever-present.
With access to a 24 hour market, this is only exacerbated, amplifying the maximum point rule in which more recent and intense positive or negative events (or “spikes”) weigh more heavily on how we remember how certain things were experienced, potentially unduly influencing decisions in the near future.
Temporary discount and the YOLO effect
But of all the biases and heuristics that I think help explain the general perception of Bitcoin today, is temporary discount – which is our tendency to perceive a desired outcome in the future as less valuable than one in the present – that is more prescient. Add to that the YOLO effect, “you only live once” hedonism and future “blindness”, into the mix, and you have a powerful crypto cocktail.
This is why.
It’s part of human nature that those who say, “I can’t see where this is going,” particularly those in the “there’s no there, there” camp, don’t attempt to imagine where it goes. Focused on the present, they seek to frame something that exists solely on the basis of what they can identify, interpret, and internalize. now.
These are the same types of people who, when cell phones were first introduced, asked “why do we need this?” They simply couldn’t foresee mobile technology powering developing nations, becoming the center of an entire payments industry, fundamentally altering telecommunications, and so on. This is not to belittle these people; the temporary discount is commonplace. In fact, you can attribute this phenomenon to the pitiful rate of retirement savings among a wide swath of the population.
The inability to imagine the future, or the simple lack of interest in doing so, leads to the desire to create shortcuts to understand and explain the “because?” Combined with the “illusion of control” heuristics, or the belief that we have more control over the world than we really do, there is no appetite for a leap of faith or confidence that, in technology, there is a world of promise.
Narrative of ‘The old new technology’
Another interesting psychological perspective can be summed up this way: Bitcoin was introduced to the world in January 2009 by Satoshi Nakimoto. At the time, it was an innovative and revolutionary idea. But now there are literally thousands of blockchain protocols and projects, many of which have surpassed Bitcoin in usefulness and promise.
Or put another way, Bitcoin is old new technology. a form of heuristic availabilityit captures our tendency to skew the information we conjure up quickly and easily to frame an opinion.
Proponents of this point of view will point to Bitcoin’s rejection of the proof-of-stake consensus mechanism (and the myriad reasons for it), a centralization of mining power, and smaller developer community compared to others.
Opponents of this view have to laugh. Fourteen years is hardly “old.” The technology has stood the test of time quite admirably compared to others, and blockchain innovation continues to advance with cross-chain bridging, ordinals, the Lightning Network, etc. In fact, it is the stability, permanence and security of Bitcoin that has Keep him at the forefront of this emerging ecosystem.
In short, when you are first, you are inevitably compared to all.
The Inflation Hedge Confirmation Bias
For quite some time, the narrative about bitcoin as an investment was that it was “an inflation hedge.” “Digital gold”, so to speak.
Many would argue that this prevailing wisdom has been discredited, at least for now. In reality, what it is, and always should have been, is a hedge against systematic institutional failure. After all, the very idea of Bitcoin was born out of a previous financial crisis. As of this writing, when banks like Silicon Valley Bank (SVB), Credit Suisse, and Silvergate have come under extreme pressure, Bitcoin is showing its mettle.
That the inflation-hedging narrative took off in such a big way is an example of confirmation bias – or our tendency to favor existing beliefs. That Bitcoin’s original raison d’être was pushed aside (by some), can be attributed to optimism bias. People simply continue to underestimate the possibility of experiencing negative events.
And even if there is no catastrophic systematic implosion, the mere potential for one opens the door to giving this new store of value a vast new footprint.
bit bias
When it comes to Web 3, crypto, blockchain, and Bitcoin, I can admit to being a bit biased. That can be written down as the belief that the fundamental attributes of Bitcoin technology – decentralization, self-custody, ownership and control – will morph in ways we cannot fully comprehend today.
In other words, if you think “there is no there, there”, maybe it is because you simply cannot imagine what that “there” could be.
Irrational? Let’s talk in 10 years.
This is a guest post by Rich Feldman. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
