Can we really make rational decisions when investing?

In the fourth part of our series, we will talk about anchoring (cultivation), representativeness and accessibility shortcuts.

Reference point (staking) shortcut

A reference point refers to using a number, value, or condition to influence people's subsequent predictions and evaluations in decision-making. For example, when the price of a product is presented as 1000 TL and it drops to 500 TL, it may seem very attractive to you. However, the same product may be considered expensive when it is directly presented as 500 TL in a different store. Even with a single question, it is quite possible to mislead people's predictions with a given reference point.

When evaluated in terms of the crypto markets, price predictions made by analysts have a compelling effect on individuals. For example, when an analyst says that X coin could reach levels of 10 dollars from 1 dollar, it affects individuals' motivation to enter and sustain transactions. Here we can talk about two different scenarios: Please provide the text to be translated. Individuals may expect the analyst's prediction to come true and wait for the $10 level, but when the price turns around at around $7-8, they may incur losses without making any profit. Second parties may sell all of their products when the price reaches $10, relying on the analyst, and may be upset when the price rises much higher, and may engage in riskier behaviors (such as buying again at higher prices).

As can be seen, the values ​​given by others can be a reference point for us, affecting our investment decisions and cognitive sensitivity. Moreover, even randomly given numbers affect our decisions and expectations. It has been observed that this effect is especially strong when given by expert individuals in the field (or those claimed to be so) (also known as the Halo effect). Therefore, if we want to be an investor, we need to develop strategies such as building our price predictions on our own and adopting gradual buying or selling habits from all of these.

**Shortcut to representation

In people's predictions and evaluations, it is referred to as basing on how close certain characteristics of a person, object, or event are to previous similar examples. Individuals look at the degree of correspondence (representativeness) between the images in their minds of the relevant person, object, or event.

When evaluated in terms of the cryptocurrency markets, every new project that emerges comes with a promise of 50-100-1000x returns, just like the projects in the previous bull market. Referring to 'PEPE' as the 'New DOGE' is a shortcut based on people's perceptions. People consider both projects as 'meme figures' and a new investor, by saying 'cat-dog coins are performing well', is trying to catch the hype of this year.

Similarly, we can see that artificial intelligence meta is popular in this cycle. People, seeing the high number of artificial intelligence projects, are looking for new RENDER or FET based on previous examples.

In the Solana network, also known as the Solana casino, new coins are emerging every day depending on the agenda in the "meme" projects. For example, the coin named PNUT, which has become famous recently, has skyrocketed and (if investors could hold on to it) has made them millions. "Investors" are now looking for the new "PNUT" and trying to hold on to new stories.

Especially in the crypto markets, the number of such stories is quite high. Therefore, it is not necessary to only look at coins, someone who says they bought a "cat-dog" coin and made 100x also creates a feeling in us that we can be like them, as we are talking about someone who was in the same position as us until yesterday...

Accessibility shortcut

It is the cognitive bias that we have recently experienced, which makes it easier to think that remarkable events, situations or cases that have taken place in our memory are more common and important than others. The potential to influence our decisions is quite high. The best example of this may be that positive examples come to mind more during periods of extreme greed and negative examples come to mind more during periods of extreme fear (see the Bitcoin Fear and Greed Index). While people's hands do not go to the "Get" button during periods of extreme fear, they easily go to the "Buy" button during periods of extreme greed. Another example is that it stays inside at high costs because it cannot go to the "Sell" button.

Looking at recent times, it is possible to see similar examples. Despite many coins in crypto exchanges dropping by 50-60% or even 70% since March 2024, the recent performance of a few coins increasing by 3x-5x makes people think, "What if the one I bought increases tomorrow?" This leads to individuals forgetting about the previous process and engaging in riskier actions, disregarding previous stories and scenarios of failure.

The lesson we can draw from this series of articles about cognitive biases is actually that we are not as rational beings as we think, there are many factors around us that affect us, and we need to pay attention to them. In the process of evolution, we gained many skills over time to survive and lost many of them, but we still have biases/tendencies from the past that we continue to maintain even if they are not currently useful. Recognizing these psychological biases that are currently not useful to us and even affect our emotions, thoughts, and behaviors in daily life, and trying to change them, at least being aware of them, will enable us to make more accurate decisions, protect us from manipulations and market fluctuations, and outperform our competitors. Understanding/trying to understand how we think and make decisions will set us apart in trading and investment life.

Please provide the text to be translated. This article does not contain investment advice or recommendation. Every investment and trading move involves risk and readers should conduct their own research when making a decision.