Description: I will freely admit that I am completely unable to understand (and frankly not very interested in) crypto currency. That said, I AM rather interested in how it was that so many people got deeply into things like FTX (Google it and Ponzi schemes). There is a lot of talk from the perspective of economics regarding the rise and then the possible burst of the ‘crypto bubble’ comparing it to the ‘Tulip bubble” of the 1700’s and the “dot com bubble’ of the late 1990’s in which fast moving investors lost a lot of money when the bubble collapsed. Maybe I am just not wired for economics but how about this psychological question? How was it that so many, likely smart and rational people, got so deep into Crypto currency? In an ironic way, the psychological means for looking at this question arises from economics. Specifically, in 2003, Daniel Kahneman (a cognitive psychologist) won the Nobel prize in Economic Sciences for work he did with Amos Tversky (also a cognitive psychologist but the Nobel people do not award their prizes posthumously) on human cognitive biases or on shortfalls in our rationality. Their work and the mountains of related work that it has generated has helped us to understand how it can be that seemingly smart, rational people happily hop unto certain ‘bandwagons’ in such numbers that ‘bubbles’ are created leading to all sorts of losses and despair when the bubbles burst. Have you heard about the human cognitive biases that lead to Daniel Kahneman’s Nobel prize? Well have a read through the article linked below to get a glimpse of what they can tell us about the thought patterns that supported many people’s dives into Crypto currency. The article does not help with one’s understanding of Crypto currency itself but if the ‘Crypto bubble has burst or is bursting then perhaps that does not mater as much as understanding out basic cognitive biases.
Source: The crypto collapse demonstrates why we need to boost financial education, Wynn Quan, The Globe and Mail.
Date: December 29, 2022
Image by Mohamed_Hassan from Pixabay
Article Link: https://www.theglobeandmail.com/opinion/article-the-crypto-collapse-demonstrates-why-we-need-to-boost-financial/
So, what did you think? I thought the brief crypto-related examples of several classic cognitive biases were very helpful in showing how people might have jumped deeply into crypto currency without a solid ‘rational’ understanding of what it involved. The description of the Ashe conformity research was useful as well in showing how sometimes people will go against ‘what their eyes see’ in making decision in the presence of others. Th conclusion in the article that a boost in financial education is needed in order to lessen the buy-in to future possible market bubbles is sound but such education should very probably include instruction in the nature and possible effect of our cognitive biases on our decisions. We are not as rational as we would like to believe.
Questions for Discussion:
- Why do you think so many people bought into crypto currency?
- What are some of the cognitive biases that could help us understand runs like that into crypto currency?
- What are some ways we might include cognitive bias understanding into an updated financial education plan?
References (Read Further):
Kahneman, D., & Tversky, A. (1996). On the reality of cognitive illusions, Psychological Review, 103(3), 582–591. Link
Tversky, A., & Kahneman, D. (1974). Judgment under Uncertainty: Heuristics and Biases: Biases in judgments reveal some heuristics of thinking under uncertainty. science, 185(4157), 1124-1131. Link
Kahneman, D., & Tversky, A. (1984). Choices, values, and frames. American psychologist, 39(4), 341. Link
Kahneman, D. (2002). Maps of bounded rationality: A perspective on intuitive judgment and choice. Nobel prize lecture, 8(1), 351-401. Link
Kahneman, D. (2011). Thinking, fast and slow. Macmillan. Link