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Why do we invest in shitcoins? (part 1)

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In this series of blog posts I am going to write about the human mind: how and especially why we are making the choices we make, for example ending up having (shit)coins in our portfolio.

Following one of the most renowned Psychologists and Nobel Prize Winner Daniel Kahneman and many other Psychologists that have contributed to the understanding of the human mind we have today, I will present you many exciting experiments and studies in this series which may change how you see yourself.

I am briefly introducing you the two systems of our mind which will accompany us during these series and which you will learn to understand. To simplify, I will call these two modes of thinking System 1 and System 2 as Kahneman did in his book “Thinking, Fast and Slow” (2011).

System 1 works unconsciously, automatically and quickly, with rather low to no effort and no voluntary control.

System 2 on the contrary requires a lot of attention and effort for mental activities, including complex computations. It is the conscious, reasoning self that has beliefs, makes choices and decides what to think about and what to do.

Let’s start with the first experiment by taking a good look at the following figure:


Figure 1: Müller-Lyer Illusion

You see two horizontal lines of different lengths, with fins added, pointing in different directions. The bottom line is obviously looking longer than the one above. We all see it like this and it lies in our nature to believe what we see. Maybe you already came across this image and can already confirm that both horizontal lines are in fact identical in length. In case you don’t know this illusion, take a ruler and measure the lines.

Now that you (your System 2) know that the lines are equally long, you will say what you know when you are asked which line is longer. But you still see the bottom line as longer, because you cannot prevent System 1 from doing its thing. You cannot decide to see the lines as equal, even now that you know they are. It is similar to when you decide to invest in a particular (shit)coin: you somehow feel that you are probably doing a mistake but you do it anyway.

You must learn to mistrust your impressions of the length of the lines when fins are attached to them and to resist that illusion. You must learn to recognize situations in which mistakes are likely and try harder to avoid significant mistakes when stakes are high. Your System 2 is too slow and inefficient to serve as a substitute for System 1 in making routine decisions.

This simple illusion visualizes impressively how our minds can fool us. Unfortunately, it is not always that obvious that we have been fooled. Especially in areas where we are new and our knowledge is limited and we have to believe what we see.

A perfect example are cryptocurrencies where we have hundreds of projects and whitepapers containing empty promises and complex phrases that no one understands because they have no substance. Often come along with questionable personalities with contradictory behaviour and populist phrases to manipulate you to invest in their shitcoin. But somehow we ignore all these red flags because we don’t activate our System 2.

System 1 is among other things often deluded by fancy and good looking websites because vision is our dominant sense. The visual appearance of products plays a significant role in determining consumer response. How a product looks will drive trial, adoption, sales and profitability (N. Crilly, J. Moultrie, and P.J. Clarkson, 2004). Looking at something attractive makes us feel good, and who doesn’t like that?

We also let us fool by (shit)coins that have massive Twitter armies and spamming us constantly with incredible token discounts. They unwittingly exploit the psychological phenomenon called mere-exposure effect, also known as familiarity principle. It shows that we tend to develop a preference for things merely because we are familiar with them. Let’s assume that we come across some shilling for a cryptocurrency on Twitter that we don’t know yet. The second time we come across that cryptocurrency, we associate it with positive attributes because our System 1 thinks we already know it. Our System 1 is fooled again and you better activate System 2 in this situation before your portfolio is full of (shit)coins.

Well, you should have learned by now that your System 1 is impulsive, intuitive and works in the background without you even realising. Therefore you need to recognize situations in which mistakes are likely, like investing in scam Crypto projects, and activate your System 2, pay attention and effort for your mental activities.

I have learned how to recognize such situations (at least that is what my mind is telling me…). That’s why I am not fooled by good looking websites anymore, even though I like them. I deeply investigate the projects, read the whitepaper (especially the technical part) and check out the social media platforms and the team (especially how the leaders behave). A good example is Ardor Blockchain Platform from Jelurida. Their company website is anything but fancy and their social media appearance is restrained. Our System 1 is therefore not deluded by that. We now have to activate System 2 to further evaluate the product. We would then find out that they do serious business and have a wonderful working product with many features that others still miss. The risk of making a bad investment is therefore much lower if System 2 is involved.

But don’t do the false conclusion that products with fancy websites are bad or that products with bad websites are good. This example is just about the involvement of System 2 and what effect it has.

Don’t always believe what you see and remember that your mind often fools you without you even (ever) finding out. Recognize such situations, pay attention, invest a little effort for mental activities and finally see behind the illusionary wall of nicely looking Crypto projects with empty promises.

I hope you enjoyed this article and until next time with more!

@bl0kphile

References:

Crilly, N., Moultrie, J. and Clarkson, P.J. (2004). Seeing things: consumer response to the visual domain in product design. Design Studies, 25 (6), pp. 547-577.

Kahneman, D. (2011). Thinking, Fast and Slow. Great Britain, Allen Lane.