What is bias in behavior? How to avoid them?

Behavioral biases, if not controlled, can lead to inaccurate cryptocurrency trading and investment decisions.

In fact, there is an entire field of study called behavioral finance, which combines the theories of psychology and traditional financial economics.

Due to these biases often occurring in the subconscious, paying attention to personal behavior is crucial to limit decisions influenced by emotions.

Human behavior and psychology have been extensively studied by Israeli-American psychologist and economist Daniel Kahneman and late cognitive psychologist and mathematician Amos Tversky.

Interested readers can refer to the work Judgment Under Uncertainty: Heuristics and Biases to gain a better understanding of the nature of behavioral bias.

What is behavioral bias?

Behavioral bias is irrational beliefs that can affect our cryptocurrency trading decisions without us being aware of it.

Common behaviors that can influence decisions include overconfidence, buying or selling at inappropriate times to avoid regret, limited attention span, and following trends.

Traders and investors should be aware of such biases and avoid them to reduce the risk of making illogical decisions.

Overconfidence

“The illusion that we understand the past makes us overconfident in our ability to predict the future.” – Daniel Kahneman

Excessive confidence often appears in traders who are overly confident in their own skills, leading to reckless decisions or trading at excessively high frequencies.

Many people also tend to place too much trust in the assets they have invested heavily in, resulting in a lack of diversification in their investment portfolio and making it vulnerable.

Although there are still exceptions, a study led by Professor Kai Ruggeri from Columbia University shows that the more retail investors trade, the less profit they make.

Consider trading less and investing more – as investing often requires in-depth research into the intrinsic value of a project or cryptocurrency.

You may also consider diversifying your portfolio after thorough research. This method helps you reduce the risk of holding only one type of token.

Avoid Regret

A study published in the Journal of Economic Theory by Professor Jie Qin of Ritsumeikan University indicates that traders tend to sell winning positions too early and hold losing positions too long – just to avoid feeling regret.

Humans are inherently programmed to avoid regret, even when it leads to irrational decisions.

To curb this trend, adhere to specific trading and investment strategies instead of making decisions during market fluctuations.

A simple way is to automate transactions with pre-set conditions regarding price and volume.

The dollar-cost averaging strategy (DCA) is a method used by many people – investing a fixed amount of money at regular intervals, regardless of the price of the asset.

You can also use a trailing stop order (, which allows you to place an order at a specified percentage relative to the market price.

This type of order monitors price direction while helping to lock in profits and limit losses – helping you avoid entering and exiting the market due to feelings of regret.

Limited Attention Span

With a plethora of tokens available in the market, the investment opportunities in cryptocurrency seem endless. However, human attention and analysis capabilities are limited, making it difficult for us to fully understand each option before making a trading decision.

Additionally, the market is always shrouded in noise – misinformation from various sources. This can lead you to act based on incomplete or distorted data.

Don’t rush into a trade if you haven’t really studied it thoroughly. Instead of “going all in”, do your own research )DYOR( and conduct proper technical and fundamental analysis before taking action.

In addition, do not place too much trust in KOLs or influencers – those who frequently share risky cryptocurrency investment opportunities.

Following the trend

A study by Professor Prem C. Jain from Tulane University and Professor Joanna Shuang Wu from the University of Rochester shows that 39% of new capital flowing into mutual funds is concentrated in the top 10% of funds that performed best the previous year.

This is evidence of the habit of following trends – which can easily lead to hasty, irrational trading decisions that are not based on sound research.

With the high volatility of the cryptocurrency market, investors can easily be misled by the sudden price surge of a token and forget to carefully assess the underlying factors.

Instead of following the crowd, consider the assets that are undervalued compared to their intrinsic value that you perceive, rather than just looking at the names that are “making waves.”

As Warren Buffet once said: “Be fearful when others are greedy, and greedy when others are fearful.”

You can also refine your trading strategy and persistently implement it, rather than rushing in every time the market “waves”.

Conclusion

Humans tend to rely on instincts to make decisions. But if you know how to observe your own behavior and maintain control over behavioral biases, the likelihood of making incorrect trading decisions will significantly decrease.

Thank you for reading this article!

Please Like, Comment, and Follow TinTucBitcoin to always stay updated with the latest news about the cryptocurrency market and not miss any important information!