The heuristics often described in behavioral economics offer insightful frameworks for understanding mainstream resistance to Bitcoin.
This is an opinion op-ed by Rich Feldman, Marketing Manager, Author, and Member of the Western Connecticut University Advisory Board.
Behavioral economics has long been quoted to describe our “irrational tendencies” as consumers and investors. I’m here to extend this discussion specifically to Bitcoin because, let’s face it, when it comes to crypto in general and Bitcoin in particular, the influence of emotions, biases, heuristics, and social pressure in shaping our preferences, beliefs and behaviors is profound… and fascinating.
Go beyond FOMO
As behavioral finance preaches, investing in anything is prone to common “pitfalls” such as fear of missing out (FOMO), loss aversion, groupthink (the bandwagon effect) and the sunk cost fallacy – which explains why people hold on to their investments longer than they should.
Such cognitive journeys are well illustrated in the chart below which, ironically, was created by Swiss credit. The light at recent events, perhaps he should have been wary of “overreach bias!” But let’s not hit him while he’s down.
The concepts of behavioral finance and Bitcoin certainly have some interesting parallels. For example: FOGI (not the type “old”), or the fear of having In. Chalk that down to a nascent commercial market that can be incredibly confusing and (for many) require a technological leap of faith.
Yet anyone who thinks this is a new phenomenon need only look to the launch of online banking, bill payment and mobile deposits to know that there is hesitation around every consumer foray into new technologies, especially as that they evolve. As such, FOGI prevents the “crypto-curious” from making the behavioral moves (i.e. learning and discovery) necessary to actually participate in the asset class.
Moreover, recency bias can certainly help explain much of the gyrations in the Bitcoin ecosystem. With so many breakthroughs, disruptions and “convulsions” making headlines seemingly every day, it’s no surprise that this irrational tendency to assume the fact that recent events will almost certainly repeat itself can easily be paired with volatility that may seem pervasive.
With access to a 24-hour market, this is only exacerbated, amplifying the tip ruler in which the most recent and intense positive or negative events (or “spikes”) weigh the heaviest in how we remember how certain things were experienced – thus having the potential for undue influence on future decisions.
Temporal updating and YOLO effect
But of all the biases and heuristics that I think help to explain the prevailing perception of bitcoin today is time discount – which is our tendency to perceive a desired outcome in the future as less valuable than an outcome in the present – which is the most prescient. Add the YOLO effect – “you only live once” hedonism and future “blindness” – to the mix, and you have a potent crypto cocktail.
It is human nature for those who say, “I don’t see where this is going” — especially those in the “there’s no there, there” camp — not to to try to imagine where it’s going. Focused on the present, they seek to frame something that exists only in terms of what they can identify, interpret and internalize. NOW.
These are the same types of people who, when cell phones were first introduced, asked “why do we need this?” They simply couldn’t foresee that mobile technology was elevating developing countries, becoming the center of an entire payments industry, fundamentally changing telecommunications, and so on. It’s not to denigrate these people; temporal discounting is commonplace. In fact, you can attribute this phenomenon to the deplorable rate of retirement savings of a large part of the population.
An inability to imagine the future, or a simple disinterest in doing so, leads to wanting to create shortcuts to understand and explain the “Why ?“Combined with the”illusion of control“Heuristics – or the belief that we have more control over the world than we actually do – there is no appetite for a leap of faith or trust that, in technology, there is a world of promises.
Narrative of “old new technology”
Another interesting psychological perspective can be summarized as follows: Bitcoin was introduced to the world in January 2009 by Satoshi Nakimoto. At that time, it was a revolutionary and groundbreaking idea. But, now there are literally thousands of blockchain protocols and projects, many of which have surpassed Bitcoin in their usefulness and promise.
Or, in other words, Bitcoin is old new technology. A form of availability heuristicit captures our tendency to bias the information we quickly and easily conjure up to form an opinion.
Proponents of this view will point to Bitcoin’s rejection of the proof-of-stake consensus mechanism (and the myriad reasons for this), a centralization of mining power, and small developer community compared to others.
Opponents of this view must laugh. Fourteen years is hardly “old.” The technology has stood the test of time rather admirably compared to others, and blockchain innovation continues to advance with cross-chain bridges, ordinals, the Lightning Network, and more. In fact, it is Bitcoin’s stability, permanence, and security that have the guard at the forefront of this emerging ecosystem.
In short, when you are first, you are necessarily compared to All.
The confirmation bias of inflation hedging
For a while, the rhetoric around bitcoin as an investment was that it was an “inflation hedge.” “Digital gold”, if you will.
Many would say that this mainstream wisdom has been debunked – at least for now. In reality, what it is, and always should have been seen as, is a safeguard against systematic institutional failure. After all, the very idea of Bitcoin was born out of an earlier financial crisis. As of this writing, when banks like Silicon Valley Bank (SVB), Credit Suisse, and Silvergate have come under extreme stress, Bitcoin is showing its mettle.
The fact that the inflation hedging narrative has taken on such momentum is an example of confirmation bias – or our tendency to favor existing beliefs. That Bitcoin’s original raison d’être has been pushed aside (by some), can be attributed to optimism bias. People just continue to underestimate the possibility of experiencing negative events.
And even if there is no catastrophic systematic implosion, the mere potential of just one opens the door to give this new store of value a vast new footprint.
When it comes to Web 3, Crypto, Blockchains, and Bitcoin, I can admit to being biased. It can be written as a belief that the fundamental attributes of Bitcoin technology – decentralization, self-custody, ownership and control – will transform in ways that we cannot fully comprehend today.
In other words, if you’re thinking “there isn’t over there”, it may be because you can’t imagine what “over there” might be.
Irrational? Let’s talk 10 years from now.
This is a guest post by Rich Feldman. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.