Nobody is 100% rational: all of our decisions are influenced by the way our minds have evolved over time. As a result, people often make wrong decisions in trading and investment that are based on emotion, leading to preventable losses.
Because the digital asset market doesn’t yet have the same kinds of robust valuation models that exist for stocks and bonds, participants are even more prone to making irrational decisions. In this post we will review the most common emotional and behavioural biases and suggest strategies for how to avoid them.
It’s a long post, so it’s best to bookmark it and use it for reference. Being aware of these biases will help you to trade with less emotion and more discipline, and to be more consistently profitable.1. Loss aversion
People want to avoid losses more than they want to make profits.
Often traders (i.e. bagholders) are reluctant to sell assets that are deep in the red, because that would mean realising a loss. Instead, they hope that they’ll go up again at some point.
Similarly, greedy traders who are prone to this bias will sell winning positions to quickly avoid any potential losses that might happen if the market suddenly moves against them.“Now that I’m down 90% I might as well keep these bags or I’ll beat myself up when they pump.” “Wow, BTC is up $500 since I bought it, I should sell it before it drops again.”
How to avoid: have a plan for when you are going to take profit or cut losses and set appropriate orders for short-term trades.2. Endowment bias
Investors often irrationally value an asset more highly, simply because they already own it.
True ‘hodlers’ take pride in never selling, but this could lead to missed opportunities. Some might even say that they don’t care about the price at all.
How to avoid: try to think about the asset independently. Would you buy or sell at this price if you didn’t alr...