Decision-Making Biases in Crypto: Cognitive and Emotional Biases

As human beings, we are subject to psychological biases of all kinds—emotional, cognitive or behavioural—which can affect our decision-making in our everyday lives. 

We have discussed fear of missing out in a previous blog post. We delve in this article into more of the most common cognitive and emotional biases when it comes to cryptocurrency investing. We then examine the strategies we can put in place to limit their impacts on our investment decisions. The first step—to recognize the biases that affect our thinking.

In Sum

• Common cognitive and emotional biases in crypto include confirmation, anchoring, availability, recency, bandwagon, hindsight and overconfidence.
• Such biases drive behaviors like chasing hype, dismissing opposing views, overestimating skill and relying too heavily on recent or familiar information.
• These distortions often lead to poor investment choices, unnecessary risk-taking and susceptibility to market volatility.
• Effective mitigation involves awareness, continuous education, seeking diverse perspectives and reflecting on past decisions to build resilience.

Trusting What Is Familiar and Comfortable

Lewis is bullish on cryptocurrency—the underlying technology of which he believes will power the next step in the evolution of finance. He reads crypto publications and spends a lot of time on online communities who echo his sentiment, and he dislikes being confronted with adverse opinions of crypto. He holds the belief that critics simply do not understand. Him and his friends celebrated hard in December 2024 when bitcoin price hit $100,000 USD for the first time. He believes that now that bitcoin has reached such a milestone, it can only go up from there.

Confirmation Bias

Confirmation bias refers to the tendency we have to seek out information which already suits the beliefs we hold deeply. When faced with information that does not fit into our existing worldview, we are likely to interpret it in a way that still supports what we believe, which can lead to cognitive dissonance.

This phenomenon had been documented some millennia ago in Thucydides’ The History of the Peloponnesian, but was formalized in the 1960s by cognitive psychologist Peter Wason. 

Confirmation bias is the motor of echo chambers that often form online as a result of the algorithms which power popular social media sites. In order to retain the attention of their users, the algorithms work to push content similar to what each user already consumes. These create echo chambers of sorts where individuals are continually exposed to ideas and opinions that reinforce their existing beliefs. This is concerning considering more than half of Americans get their news from social media.

In the example above, Lewis frequently visits and participates in online crypto communities where he is surrounded by like-minded individuals. He dismisses opposing viewpoints and neglects sources that might offer a fuller picture of cryptocurrency’s strengths and weaknesses. In that scenario, Lewis becomes increasingly entrenched in his beliefs, interpreting every new piece of information through the lens of confirmation bias.

Anchoring Effect

The anchoring effect is a  psychological phenomenon where we rely too heavily on a single piece of information which acts as an “anchor”. Once an anchor is set, we tend to compare all subsequent information against it, often anticipating outcomes based on that initial reference point. This overreliance can distort perception and lead to biased decisions, especially when the anchor itself is irrelevant or misleading.

In Lewis’ case, the price of Bitcoin hitting $100,000 USD became an anchor, shaping his expectations about its future performance. Instead of assessing new information objectively, he interprets subsequent price movements in relation to that milestone, assuming that because Bitcoin once reached $100,000, it is bound to continue rising.

Case in point: the price of BTC dropped to as low as $76,273.56 USD in the months following a historic December for cryptocurrency.

Following the Crowd

Amala keeps hearing on the news and seeing on social media that a new meme coin, ZNP, has been skyrocketing. Because these success stories are the most vivid in her mind, she assumes the token will keep rising. When her colleagues all start buying ZNP too, she feels pressured to join in, thinking “everyone can’t be wrong”. She invests heavily without proper research, only to face losses when the token crashes.

Availability bias

The availability heuristic, as articulated by Tversky and Kahneman, refers to the tendency to rely on what comes quickly and easily to our mind in order to make decisions or predictions. Often, what tends to be most remembered is what is trendy, such as the fictional ZNP token. The brain takes a mental shortcut to the most easily available information, instead of putting more work into articulating a sound analysis.

Within the parameters of the availability heuristic, Amala assumes that what is currently popular will keep rising in both popularity and in price, instead of relying on in-depth research to inform her investment decision, which could have prevented some of the losses she faced.

Recency Bias

Recency bias is a form of availability bias. The most rapidly and easily accessible information in one’s mind are recent events compared to older ones, and thus, recency bias describes the tendency to give more importance to new information or recent events, discounting the importance of historical patterns.

In Amala’s scenario, she assumes that recent events—ZNP’s skyrocketing price—will necessarily reoccur, which is something that could have been disproven by reading about meme coin volatility.

Bandwagon Effect

The pressure introduced by Amala’s close circle buying ZNP is what triggers Amala’s decision to invest in turn. This is a textbook example of the bandwagon effect at play, which is closely intertwined with the fear of missing out, an important factor in cryptocurrency volatily.

The bandwagon effect describes a situation where individuals decide to do something based on the fact everyone else appears to be doing it, in effect overriding initial instincts.

Mistaking Luck for Skill

Kim was an early adopter of bitcoin, purchasing his first BTC for $306.07 USD. Today, his wallets hold assets valued at hundreds of thousands of dollars. He believes the success of Bitcoin was obvious in hindsight, and now he is determined to identify the next cryptocurrency with the potential to achieve similar success.

Hindsight Bias

Hindsight bias is the tendency to believe after an event has occurred, that its outcome was predictable all along. Once the result is known, people unconsciously rewrite their memories, amplifying the significance of signs or patterns that seemed obvious in retrospect—even if they were unnoticed or ambiguous beforehand.

In hindsight, Kim believes it was always clear to see that bitcoin would know great success. This belief minimizes the uncertainty, risk and skepticism that existed at the time of his original investment, leading him to misjudge how much foresight was actually involved. By reconstructing the past as more predictable than it really was, Kim may develop unrealistic confidence in his ability to forecast the future, leaving him vulnerable to make a decision based on that self-perceived ability alone, without doing additional research to inform his investment.

Overconfidence Bias

The overconfidence bias refers to the tendency humans have to overestimate their own ability in performing different activities. A study found that 74% of surveyed professional fund managers believed they were above average at investing, with the remaining 26% believing they are average—proportions which are completely statistically impossible.

Kim’s overconfidence about his own skill and ability to predict the future may lead him to make rash investment decisions as he overestimates his own skill and underestimates the impact simple coincidences can have on making his fortune.

Mitigation Strategies

We can use different strategies to mitigate the decision-making biases that may affect us.

Be Aware of Cognitive and Emotional Biases

The first step to mitigating the impact of cognitive and emotional biases on our lives is to become aware of them. By learning to recognize these biases when they surface in our thinking, we can respond more thoughtfully in situations that might otherwise trigger automatic or distorted reactions. Taking the time to study common biases equips us with a practical toolkit—one that allows us to pause, reflect and challenge ourselves when we notice that our judgments are being influenced by them.

Educate Yourself and Always Learn More

Education is a lifelong process and effort. There is always more to learn in the financial sphere—especially when it comes to a subject as new and rapidly changing as cryptocurrency. New projects, regulations, technologies and risks are constantly emerging.

To stay ahead, commit to continuous learning. Follow credible news sources, research blockchain technology, study economic principles and explore how governments and institutions are responding to digital assets. Engage with communities, attend webinars and never hesitate to question what you don’t understand.

Seek Diverse Perspectives

While staying in touch with the broader crypto community is a good step for learning, it is also important to seek diverse perspectives. Though we may be extremely enthusiastic about cryptocurrency, confronting ourselves to adverse opinions allows us to have a more complete comprehension of it. 

Understanding a skeptic's reservations can be enriching in different ways, strengthening our ability to make balanced, well-informed decisions and fostering intellectual resilience. Ultimately, cultivating a habit of learning from both advocates and critics ensures that our perspective remains grounded, realistic and adaptable in a rapidly evolving financial landscape.

Learn from Past Mistakes and Successes

Learning from one’s past mistakes and successes

In the fast-moving world of crypto investing, one of the most effective tools for improving decision-making is reflection. Looking back at both failures and wins allows us to extract valuable lessons. By systematically analyzing past actions, we can reduce the impact of cognitive biases that often distort judgment. Reflection also promotes emotional detachment. Analyzing past outcomes encourages us to view trades objectively rather than as personal failures or, on the other hand, as overestimations of our abilities. This distance helps break emotional attachments and reduces the influence of biases

In our next article, we tackle behavioural biases in decision-making.

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Frequently Asked Questions

What are cognitive and emotional biases in crypto investing?

They are subconscious patterns of thinking or feeling that distort decision-making. In crypto, these biases can lead investors to make irrational or risky choices.

What is the availability heuristic in crypto markets?

It’s when investors make decisions based on the most vivid or recent news (like a trending meme coin), rather than thorough research.

What strategies can help mitigate cognitive and emotional biases?

Awareness, education, seeking diverse opinions and reflecting on past decisions are proven ways to limit their influence.