Top investor psychological biases and how to overcome them
Investing is primarily a matter of strategy, analysis, and calculations. However, even the most experienced investors can be influenced by emotions and unconscious biases. These psychological biases affect decision-making, often without awareness, and can be costly if not recognized.
In the volatile world of cryptocurrencies, where price fluctuations are frequent and intense, these biases become even more significant. Investment decisions are not purely rational—they are also driven by emotions. Let's explore 5 common psychological biases, how to identify them, and strategies to overcome them for better financial decisions.
Bias #1. The "confirmation" bias – seeing only what we want to see
"Seeking to be right is the best way to be wrong."
We all like to be right. Confirmation bias is the tendency to seek out and believe only the information that supports our preconceptions while ignoring anything that contradicts them. We dismiss or overlook opposing viewpoints—often without realizing it—leading to a biased and incomplete thought process. Since the initial data is "filtered," our conclusions are inevitably skewed.
In the world of cryptocurrencies, this bias can:
- Make you ignore warning signs.
- Make you susceptible to biased opinions from influencers or forums.
- Limit your ability to objectively evaluate a project.
Takeaway: This bias is currently amplified by social media algorithms and their siloed operations, which tend to keep us in our bubble by only presenting content that aligns with our views (or what they believe to be our preferences).
Concrete example: You're convinced that an altcoin will explode and become a major player. You spend hours reading posts on Reddit or watching videos on YouTube that confirm this idea, ignoring analyses that show the project's team lacks transparency, the smart contract has flaws, and adoption is low.
Result: The token loses value, but the confirmation bias prevented you from spotting the red flags in time.
How to address this?
Step back and actively seek opposing views, maintaining a critical mindset. Analyze risks with the same rigor you analyze opportunities. Force yourself to join diverse communities to expose yourself to different viewpoints, and diversify your information sources.
Don't hesitate to talk about it with those around you or your loved ones to gather their opinions, even if they differ. Not sure how to bring it up or where to start? Check out some tips on how to approach the topic in our article below.
Bias #2. The "loss aversion" bias – when fear dominates your choices
"The fear of losing makes us never win."
Loss aversion is a universal phenomenon: we all hate losing. A loss of €100 often affects us more than a gain of the same amount makes us happy. As an investor, this fear can distort our judgment and prevent rational action.
In the volatile world of cryptocurrencies, this bias manifests in several ways:
- Refusing to sell a losing crypto: Hoping for a miracle turnaround rather than accepting the loss and reinvesting elsewhere.
- Selling a winning asset too quickly: Cashing out profits too soon, fearing a drop, and missing out on potentially higher gains.
Concrete example: You bought an altcoin at 1 €, and its value drops to 0.50 €. Rather than selling to reinvest in a more promising project, you hold on, hoping it will return to its original price.
Result: Meanwhile, other opportunities that could have compensated for your loss slip away.
How to address this?
Learn to demystify losses. They are part of investing. A helpful tip is to set predefined entry and exit thresholds for different cryptos to help counter loss aversion bias.
This strategy, used by even the most seasoned investors, allows you to block emotions and avoid the urge to sell too quickly, or not quickly enough. You simply follow the choices you made before emotions (fear, anxiety) interfere with your financial decisions. Set clear goals for each investment, and stick to them!
Bias #3. The "overconfidence" bias – how overcertainty can be costly
"Believing you know everything is already a mistake."
The overconfidence bias leads you to believe you're better or more skilled than average, often relying on past successes or superficial analysis. By overestimating your knowledge or ability to predict market movements, you might take reckless risks, especially in the unpredictable cryptocurrency market.
As an investor, this bias may manifest in several ways:
- Overestimating your ability to time the market.
- Ignoring warning signs thinking "you know better than others."
- Concentrating your portfolio in a few projects, often focusing on just one.
Concrete example: After making a profit on a promising token, you invest heavily in a new ICO (Initial Coin Offering), convinced of repeating your success, ignoring warnings and potential flaws in the project.
Result: The project collapses shortly after, leading to significant loss.
How to address this?
Learn from mistakes! When this happens, review the situation. Did you take the time to research enough? Did you knowingly ignore the red flags, carried away by emotions and the certainty you could repeat your previous success? If you're honest with yourself, you'll be more cautious next time, and it's unlikely to happen again!
Learn from mistakes, but with amounts within your reach (by @Hasheur)
Diversification is your best ally. Don’t put all your eggs in one basket, and remember that even experts can be wrong. Take the time to analyze each project and don't let past success dictate your future decisions.
Bias #4. The "availability" bias – judgement based on recent or striking examples
“What we remember often hides everything we’ve forgotten.”
The availability bias is the tendency to make decisions based on easily recalled examples, often recent or emotionally charged, rather than on a thorough analysis. In other words, what is "easily available" in our memory can disproportionately influence our choices, to the detriment of a broader perspective.
Prehistoric Man or Investor, it's the same struggle! (by @FabienOlicard)
In the world of cryptocurrencies, this bias can manifest in several ways, such as:
- Overestimating the likelihood of a similar success to a recent project that skyrocketed and you've just heard about.
- Remembering a major price surge (or sharp crash) and thinking it will inevitably repeat in the short term.
Concrete example: After seeing a token rise by 500% in just a few days, you impulsively invest in similar projects without checking their fundamentals.
Result: hese new projects don’t follow the same path, and you end up wrecked.
How to address this?
To overcome this bias, take the time to look at historical data and the fundamentals of a project instead of relying on anecdotes or recent trends. Ask yourself these questions before investing:
- Is this opportunity backed by solid facts?
- Have I considered the potential risks as seriously as the expected gains?
Additionally, diversify your sources of information to avoid being influenced solely by striking or popular stories.
Bias #5. The "herd" bias – blindly following the crowd
"Be a wize sheep, don’t follow the herd!"
The herd mentality refers to the tendency to follow the majority’s decisions without analyzing the information rationally. In cryptocurrency, this bias often shows up when collective euphoria leads investors to jump on a project simply because "everyone else is doing it." This is the well-known FOMO (Fear Of Missing Out)—the fear of missing something interesting that others have already accessed.
This bias can lead to two opposite yet equally dangerous behaviors:
- Massively investing in a crypto at the peak of its speculative bubble.
- Panic selling during a crash without taking the time to analyze the situation.
Concrete example: A token’s price triples in a few days. Fueled by excitement on Telegram and Reddit, you buy at a high price, hoping for quick profits.
Result: Soon after, the price crashes, and you suffer significant losses.
How to address this?
To avoid this bias, always analyze the fundamentals of a project and establish a clear strategy, rather than giving in to the crowd’s pressure. In short, avoid making impulsive decisions based on collective emotion, and take time to assess a project’s fundamentals before following the crowd, even during volatile times.
Again, setting clear buying and selling thresholds will help minimize reactive behaviors, and remember: following the herd is not always synonymous with safety.
Up to you!
Investing means accepting that our decisions are never perfectly rational. Psychological biases are part of the human experience, but by recognizing and understanding them, you can reduce their impact. Whether you're a beginner or an experienced crypto investor, take the time to ask critical questions and adopt solid strategies to avoid mental traps.
In the fast-evolving world of cryptocurrencies, mental discipline and the ability to step back make all the difference!
Emeric Fillâtre
02/26/2025, 2:16 PM
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