Today’s article which you are about to read could be very beneficial if you are involved in trading or investing sector whether you are a veteran or a novice trader.we are involved in precious metal trading from more than a decade and we have seen how our mind can become our enemy when it comes to being successful in the field.
To explain this Psychological Trap, we will need you to imagine the following circumstances given below. However, keep in mind that the following circumstances given below are related to crypto-assets investment, but it can be applied to any financial instrument and are not limited to cryptos only
Imagine your friend whom you trust to have unique expertise in blockchain technology. You have already seen him discussing about the possibility of revolutionizing the financial world through blockchain and tokenomics but you find it annoying, speculative and not seems to care nevertheless one day you chose to research on this subject and based on your study you also find it quite exciting at the same time you also got aware that the investment part is risky. At this point, you are in a dilemma about whether to invest or not. Days, months and years have passed, and it seems you overlook the whole blockchain concept though on the other hand prices were kept climbing, and almost a bubble has formed which took prices to $6000 per BTC. You checked the prices and regretted as you could have purchased the same BTC at $1000. Once again you decided to research, and this time most of the research platform has filled with the articles where experts were predicting prices to reach $200000 in the long run and advocating only to buy for the long term. At this point, you finally decided to jump on the bandwagon and bought 2 BTC (however you decide to allocate more capital if prices will decline to about $3000). Prices kept rising, and in only two months, your portfolio increased from $12000 to $36000. You felt pleasure, but you also thought that $36000 is not a big chunk of money and you’ll not be able to live a lavish life with this amount. You decided not to withdraw as experts have told you to hold for the long term however some responsible technical analyst started to warn you about the likelihood of a substantial possible correction in bitcoin but you refused to heed anyone’s advice especially on investing in Bitcoin, you only read those articles or watch videos which somehow confirm your bias. You felt confident, or we might say overconfident. Now Prices started to decline, and your tendency to check your portfolio multiplied ten times. In only one year the whole bubble has popped and now your portfolio which used to worth $36000 at one point now worth only $6000. Prices declined to $3000, but you refused to allocate more capital; however, at one point, you wished prices to decline at this level. The pain which you felt now is 2.5X more prominent than your pleasure when you were in profit.
In this story, the following psychological traps are responsible for your losses-
Herding
You slip into the herding trap as you had the option to invest when bitcoin was at $1000, but you only chose to invest when it reached $6000 as experts were predicting $20000 and you followed the crowd. If you are following the herd in investing, it means that you are probably already late and you are buying it when it is expensive.
Mob mentality is a tactic that was passed on from our ancestors and believes that there is strength in numbers. Unfortunately, this is not always the best strategy in the financial market as following the crowd is not always the right move.
Ironically, this herding mentality among investors is the primary reason for ‘bubbles’ in the financial markets.
As an investor, you should perform your analysis and research on every investment
decision and avoid the temptation to follow the majority.
Greed
You fell into the greed trap as you had the option to withdraw your profit or at least half of your profit, you also had the option to trail your stop loss but you didn’t. You thought if in two months portfolio grew 3x times then in the coming year’s profits will be unimaginable but refused to take any precautions and didn’t thought about the negative side. you also thought that $36000 is not a big chunk of money and you’ll not be able to live a lavish life with this amount. Here you need to understand that each one of us has a different financial need if you’ll try to compare your profits or net worth to others you’ll never be satisfied.
Comparison is the death of peace and well-being.
Superiority trap
You slip into the superiority trap because when responsible technical analyst started to warn about the likelihood of a huge possible correction in bitcoin, you refused to heed anyone’s advice.
The superiority trap is extremely dangerous. Many investors think they know better than the experts or even the market. Just being well-educated and smart does not mean you would not benefit from competent, independent advice. Also, it does not mean you can outwit the pros and a complex system of markets either. Many investors have lost fortunes through being convinced that they were better than the rest.
Confirmation bias
We believe that this trap is one of the most dangerous which blinds investors. Confirmation trap is when investors seek out information that validates their opinions and ignores any theories that refute it. You fell in this trap as you were only reading specific articles or watching videos which were predicting insane higher prices or somehow confirming your bias. Before investing in any asset, we advise you to follow only those pieces of recommendation from the experts in which there is no conflict of interests involved. Make sure you get objective advice from reliable sources.
Conflict of Interest Scenarios
Receiving consulting fees from a company while performing clinical research on the company’s technology.
Owning stock in a company while performing research sponsored by the company.
Fear
You slip into the fear trap as at one point you were determined to allocate more capital and wishing price to dip at your specific level but when it did The fear of losing almost made you paralyzed, and you didn’t take any action however in investing the right time to buy any assets is when the general public is overlooking it, and there is no euphoria involve of course the first step is to dig deep, and research on the particular asset in which you want to invest in, The technical part or the price where you want to buy in comes latter.
Loss Aversion
Research has shown that we’re 2.5 times more likely to notice a possible loss than a gain. Because of this tendency, you’re most likely going to pay a lot more attention when your portfolio is doing poorly than when it’s doing well. To avoid this, you should pay more attention to your portfolio’s performance over time than to its recent losses (or gains). This complicated psychological trap is very hard to overcome as Humans’ Brains Are Hardwired for loss aversion.
Research– https://www.casact.org/pubs/forum/94sforum/94sf049.pdf
The human mind is very complex and there are many factors both internal and external that can affect the decisions we make. Nobody is perfect and it is only human to fall into a psychological trap. The best way to mitigate these effects is to stay open to new information and think practically about how the investment will affect you as an individual. You should also seek the advice of industry experts to ensure that your investment decisions are based on well-researched information that can help you make unbiased decisions.