Welcome to the Crypto podcast. Do you expect us to talk? Aye, you'll be shaken AND stirred. Now meet your hosts, Doc and Mav. views and opinions heard on the ready set crypto podcast are not necessarily the opinion of this company nor its management material on this program is for general information only and should not be taken as specific investment tax or legal advice.Speaker 2:
Hello everyone. This is doc severson with episode nine of their ready set crypto podcast. Today's topic is another tale of the tape right. Discuss some of the more personal elements of trading, those being the challenges of trading financial markets that we all share since we're human. If making real time decisions and financial markets were easy, then everyone would have a perfect portfolio growing at 40 percent a year. As I've stated many times, this is one of the most difficult ventures that you'll find out there or people find out about the concepts of risk and reward and also find out for the first time that the biggest opponent is not really the market but rather themselves. Let me restate and amplify that. For those of you new to trading financial markets, you're not really trading against the market. You're actually trading against yourself. Think back over the last year or so and to the net effect of every decision that you've made. Are you happy with the outcome of those decisions? If you're like most investors, you're not, and you'll wish that you could get a Mulligan for a do over the market didn't force you to make those decisions. You did. Folks, you are your most formidable opponent that you'll ever face in the markets, not the market itself. The market's just moving around, going up and down, trying desperately every day to tell you what's happening. It's up to us as to whether we'll actually listen to what it's saying. Why is it that we have trouble making the correct decisions? Part of it is just the outright and knowledge gaps that we have where we might not understand how markets move and all the nuances that go along with financial markets that we talk about in this space and in our newsletter, but more often than not, it's because of cognitive biases that humans have. Why is it that two people can be involved in an auto accident and they have completely opposite stories as to what happened? How can two people have a conversation with each other? Yet they each hear a different version of what was said. These occur because of cognitive biases and they change the lens through which we see every day events. The more emotion that's associated with that event, the more of these biases play a role to color our perception, reaction and response. Ever notice them when a really heavy situation is happening to a family member or a friend, it's easy for you to analyze the situation and dispense was solid. Objective advice. You can clearly see what's going on is the situation does not affect you personally. In fact, you're a little frustrated with the other person because they just can't see through that fog of war and they're letting their emotions get in the way. That's cognitive bias at work. Now, when the same thing happens to you, all of a sudden nothing makes sense anymore and life rushes that you like a freight train. You can't make decisions and you just want the pain to go away. Friends can try to talk to you about what to do. Their advice sounds good, but they can't make the pain go away. That nagging pit of worry and your stomach wants you to do something now to stop the pain. These emotional responses that we take to make the pain go away or almost exactly the exact wrong action to take. If you've ever drunk, dialed and x at 2:00 in the morning, you know what I'm talking about, so before you start to confuse me with Oprah Winfrey, let's get back to trading and show how some of these cognitive biases can mess up your investing. And Oh, by the way, I'm not a psychologist, so don't believe anything that I say here and do a little bit more research on your own. If you're skeptical about these concepts. I want to reiterate that my education was as an engineer and technologist, and I've only learned about these concepts over the years because I wanted to understand my own crappy decisions and why I was making them. Let's get to our first cognitive bias that everyone makes when they first get into investing, and that's the bandwagon bias. Yep. This bias is pretty much what it sounds like. Our human bias of jumping on the bandwagon, this human biases, our tendency to want to conform, to be part of a crowd, to go along with the actions of others because they believe in them seriously. Who listening to this hasn't done this. I mean, it's great fun to go to a football game with 90,000 other rabid fans and you're all one big happy family rooting for your team, but if you do this online, falling into a forum discord channel or sub reddit that swoons over a coin and every third post is talking about a moonshot. It can be really hard for the novice investor not to be swayed by that, especially if you hold the other members and high regard. Look, humans get along with dogs because at our core, we're all pack animals and we feel belonging and strength in a crowd, but the resulting bandwagon bias will eventually hurt you badly if it hasn't already. The Cure for the bandwagon bias is to do your own research and think independently. However, my experience with this and my prediction for the novice traders out there is that you will begin to do this until you've been burned following a crowd. Perhaps you haven't yet, but if you follow a crowd, it's only a matter of time before that side is too crowded and the fade is on. The second investing bias that I want to cover is something that normally comes after the bandwagon bias and it's called confirmation bias. You already know this, you just might not know it by name. Confirmation bias only comes when we have formed an opinion or a point of view on something. See, newer investors don't really have a point of view on things which is why they fall for the bandwagon, but as you gain experience, you will start to form strong opinions and some of them can be very, very firm. Perhaps you have done a ton of research and you stand by your opinion. That's something's going to happen in the near future. We're confirmation bias comes in is when you are so married to that opinion or view that you seek information that confirms your point of view. Once you read someone else's opinion that agrees with your own, you feel that certain sense of satisfaction like see even they agree with me. The problem with this bias is that it's like a one way mirror. You can only see one outcome that agrees with your opinion and why this bias is so dangerous is because you can get blindsided by this freight train of a move as the market that's your following goes the exact opposite direction. In fact, you're shocked that the market dares to differ with your opinion and you just can't believe it. Normally. This is where investors hold on for too long and take way too much heat on their trades because they just can't accept reality. That differs from your opinion. As long as the price moves opposite to their belief, they will constantly google opinions that fit in with our own confirmation bias until it's too late. Confirmation bias effects the newer as well as the more experienced investor, sometimes the ladder even more because a certain amount of arrogance can accompany their opinion. Of course, the fix for confirmation bias is to accept the belief that anything can happen in financial markets at any time. What happened in the past is not necessarily affect the future and markets can move any direction that they want to for any length of time, without conforming to our opinion. It just doesn't care. It's taken me a long, long time to accept this as fact. The next cognitive bias that affects investors is called loss aversion bias. People have a tendency to avoid losses more than they see gains. This means that the loss of a dollar is more immediate and emotionally impactful than the gain of a dollar. One of the most common questions that I receive as a trading coaches, what strategy can I trade that is the most conservative? I don't want to lose money. In fact, that's sort of the holy grail of investing that everyone seeks a strategy that never loses while it allows them to pile up earnings. Most that asked this question, do not understand that there is no reward without risk, otherwise, money markets or certificates of deposit are going to be the way to go for them and we all know what they are paying these days. Here's another way to put it. If I have a strategy that offers me is 65 percent probability of losing $5 or winning $5 over the next week, I would personally take that trade all day long every day. Why? Well, isn't this what a casino does? They just operate on the probabilities and they don't worry about it. When a black Jack dealer bus on one round loss of version can be particularly difficult bias to overcome, especially for those that are operating without a lot of risk capital. The cure for loss aversion is to think of your trades in a probability sense, which also forces you to understand the statistics for your trading strategy and to make sure that you have a defined edge in the markets that you trade. The next cognitive bias to cover is called recency bias. This is a. we're investors have a tendency to overweight the most recent information available to us versus anything in the past. After the trade center attacks in 2001, all I heard from investors was how to protect themselves against the next attack after the financial crisis in 2008 investors have spent the last 10 years looking over their shoulders thinking that every red candle is the beginning of the next crisis and when this crypto bear is over, no one will believe it for the first six months as they continue to look over their shoulders with every red candle being the next beginning of the end. We are most effected by what has just happened, but if you work the financial markets long enough, you'll find that markets do not have any conscience, nor any memory of what just happened. They have a remarkably quiet, short term memory. While humans tend to hold onto emotional experiences like that for a long time. Again, if you believe in the fixed for confirmation bias being that can happen in the markets from one day to the next, then you'll also learn to just trade what's in front of you without attaching any recent history to it. This can be a really difficult bias to read from your investing. Now, if you find this list of cognitive biases interesting and applicable to your investing, you might start to hunt around and learn more. In fact, I just found a site that shows 25 of these cognitive biases which would take us all day to go over and I'm not sure how relevant that all of these are to investing, so I just have one more for you that I see all the time. It's called the anchoring bias. This is our tendency to hold onto or anchor on the first piece of information you receive when you were younger. You might've been told about how Santa Claus travels around the world on his sleigh on Christmas Eve, distributing gifts to kids everywhere. You held onto that belief for probably quite a few years before that fable began to unravel for you. Based on fact, and when it comes to Crypto, perhaps someone told you about an awesome project or coin that you felt was a great investment. You anchored on that one piece of information and now it's a year later and that project has gone nowhere. It's one thing to be disciplined as an investor, but don't confuse inflexibility and anchoring with discipline. We have to question our investments and our strategies on a constant basis if we're to be effective and nimble investors, this was the list of the five most common cognitive biases that I see from investors day after day and quite frankly, these are the ones that have taken me the most effort to remove from my own trading and investing my own confusion and puzzlement as to why I was making boneheaded decisions lead to this field of study and folks, if you need any assistance on how to get rid of your own cognitive biases, please reach out to math or firstname.lastname@example.org. Thanks for listening folks. I'll see you in the next podcast.