• The article discusses how behavioral economics affects our investment decisions when it comes to Bitcoin, and why we may be hesitant to invest in the asset class.
• It examines several cognitive traps such as fear of missing out (FOMO), loss aversion, groupthink and the sunk-cost fallacy that can lead to irrational decisions.
• Additionally, it touches on recency bias and the peak-end rule which can influence how we remember events and make near-future decisions.

Behavioral Economics & Bitcoin

The intersection of behavioral economics and bitcoin is a fascinating topic. Behavioral economics helps explain our “irrational tendencies” when it comes to investing in bitcoin, from common “traps” such as fear of missing out (FOMO) to the more subtle recency bias or the peak-end rule.

Fear Of Missing Out (FOMO)

Fear of missing out (FOMO) is a common cognitive trap that leads people to hold onto their investments longer than they should. Although there can be hesitancy around any new technology, FOMO paralysis keeps many people from investing in crypto at all by not making the necessary learning and discovery steps required for participation.

Recency Bias & The Peak-End Rule

Recency bias can also play a role in the Bitcoin ecosystem since its volatility makes it prone to headlines about advances, disruptions and seizures every day. This can cause investors to assume that recent events will likely repeat themselves, leading them astray with their decisions due to this irrational tendency. Additionally, the peak-end rule states that most recent intense positive or negative events are what we remember most heavily—which can have an undue influence on near-future decisions.

Groupthink & The Sunk Cost Fallacy

Groupthink is another cognitive trap often associated with investing in anything—from following “the bandwagon” effect without considering other options objectively, to holding onto investments much longer than one should due to the sunk cost fallacy which assumes past costs cannot be recovered nor changed so they must be taken into account even if they don’t make sense economically speaking anymore.

Conclusion

In conclusion, behavioral economics plays an important role when it comes to understanding how our emotions, biases, heuristics and social pressure shape our preferences and beliefs as consumers and investors—especially when dealing with Bitcoin where these concepts are very relevant indeed.

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