Why am I not taking the transaction whose outcome I know, but taking the ones I don't know?

In the third part of our series where we examine cognitive biases in crypto, we will talk about confirmation bias, hindsight bias and correlation illusion.

Verification bias

Confirmation bias is the tendency for individuals to prefer parts that are related to their own thoughts and beliefs when searching for, selecting, interpreting, or remembering information. In other words, the information we prefer tends to confirm our beliefs, and we tend to accept the information that suits us while ignoring the ones that do not. Confirmation bias is said to be one of the most common biases in financial markets.

There are several reasons for this. First of all, almost all of us want the decisions we make to be right, and making mistakes makes us feel bad. Second, the human brain has evolved to solve problems quickly, so we tend to reject or deny ideas that would contradict or falsify us cognitively. It makes us feel bad if the decision we make is wrong, and we turn to resources to validate our own ideas to prevent this feeling.

For example, many investors continue to hold onto the product despite the bad news surrounding it, adding to their position even though the price has dropped significantly, and acting on the belief that it will eventually recover. However, a good investor should always be skeptical, create specific strategies and plans for themselves, and determine in advance how long they will stay in a trade or under what circumstances they will exit. Even if the situation is uncomfortable or unpleasant, they should confront the facts and seek ways to overcome the difficult situation.

Finally, the feeling of people agreeing with us doesn't actually mean anything, but it makes us feel better because people are pleased when others share the same fate. Because we get caught up in the feeling that 'if we all think the same thing, it must be right.' In parallel with the concept of shared fate, individuals prevent themselves from making internal attributions of being bad when they experience losses (I didn't just lose, the market maker wanted to catch everyone), they try to maintain their well-being and their perspective on the market, and they justify their losses.

To find out if you're getting confirmation bias when you're in a transaction, you might ask yourself, "Am I listening to people or everyone who agrees with me?" When I first started leveraged trading as an individual experience, I talked about the short trade I opened to PEPE. The price kept going up after the transaction, I kept asking the people I followed at the time for their opinions on the market, and I had a perception that people who looked the same way as me were better. People were quite relieved on the bearish side, and I felt bad when I saw the bullish charts. After a while, when everyone started to look upwards, I closed my trade even though it was at a loss, and the price reached the point I wanted the next day. At this point, what I should have done was to reconstruct my plan after evaluating the information that would both support and refute my own ideas.

I knew the bias

"I knew bias", which many people fall into, is a cognitive bias in which people state that they already know about an event after it has been experienced or proven. This is especially common with people in the stock market and crypto markets. People state that they can predict rises and falls, events such as black swans, economic crises, wars and many more much earlier. For example, when the 2008 Economic Crisis took place, it was seen that many analysts stated that it was obvious that the crisis would take place and that they would have been very profitable if they had traded at that time. On the other hand, when the relevant period was examined, it was seen that many people lost a lot of losses and lost many of their assets.

Similarly, in the crypto markets, phenomena and traders often make two-way statements, claiming to know what each rise and fall will be like. Logically, if so many people could accurately predict the market's direction, we would see many more people getting rich and less need for these individuals to deal with others on such platforms.

When Bitcoin returned from the $15,479 level, many people expected the markets to fall even further. However, looking at social media platforms, most people now express that they were the ones who encouraged others to buy coins and invest during that time. Later, investors and traders who entered the market also say that if they had been trading during that time, they wouldn't have missed this opportunity. However, under those conditions, no one dares to take positions except for the big players (we can confirm this by looking at the lack of market volume during that time). Knowing something and taking action are different things, and the biggest indicator of whether someone knows something or not is whether they are actively involved in the market.

Correlation illusion

It is called perceiving a relationship between two variables that are actually not related. It makes us feel more comfortable for a subject to have a specific framework and clarity rather than being uncertain. Therefore, we tend to look for patterns and extract meaning in many subjects. For example, the formations (descending triangle, rising wedge, etc.), which are the first things many new investors learn when they start their trading journey, have emerged from this sense of pattern searching. Similarly, many new users try to capture patterns that others do not see in the market and try to find a relationship between two currency pairs that are actually not related.

For example, I read an article stating that at one time the rise and fall of LTC, and at another time LINK coins, signaled the increase and decrease of Bitcoin. If you have this kind of mindset, the probability of making trades based on erroneous assumptions is quite high, and it is very likely that you will lose money. You must remind yourself that financial markets are independent of a single coin and much larger, and that trying to make money easily and with a single tactic will result in failure. Many factors such as interest and inflation rates, the amount of global dollar reserves, countries' relationships with each other, and microeconomic and macroeconomic events affect the markets.

This article does not contain any investment advice or recommendation. Every investment and trading action involves risks, and readers should conduct their own research when making decisions.