Home blog Disposition, Bandwagon, and Gambler’s Fallacy Effect in Crypto Trading

Disposition, Bandwagon, and Gambler’s Fallacy Effect in Crypto Trading

by Yash Ranjan
Crypto Tradi

In crypto trading, it is undeniably vital to be astute. As a trader, you cannot afford to get carried away by your emotions. Otherwise, too many wrong moves will occur. To make a sound decision, one must first understand the existing prejudices within our thinking. 

Let’s start with the effect of disposition. According to PBS, we find it hard to get rid of assets that are worth less than we purchased them. Traders and investors have seen this type of behaviour before. When a trader does not instantly recognize the losses and gains on a financial asset, you know they have a disposition effect bias. According to professional studies, an investor realizes his gains on his investment sooner than his losses. As a result, investors tend to stay on to loser deals while selling winners too soon. They sell an asset early rather than retaining it to maximize profit. And, rather than selling an asset right once to reduce losses, they keep it.

Investors and traders act this way because when they sell an asset at a loss, they appear to concede that they made a mistake. Simultaneously, it makes people feel right when they sell it, even if the gains are minor. They are, in other terms, preserving their pride. In the end, it is the trader who bears the brunt of the market’s harshness. To be as informed as possible on the risks of crypto trading, you can visit a reliable trading platform such as BitiQ.

The Bandwagon Effect is the second. One of the most typical characteristics of a person is to follow the crowd. The bandwagon effect is when a person makes a decision based on the majority’s decision rather than their judgment. Even though their decision is better, they choose to follow the majority. Herd behaviour is a phenomenon that occurs in many parts of life, including politics, social interactions, and economics.

However, in the financial world, these characteristics are quite harmful. The bitcoin craze of 2017 is an ideal illustration of this. Many individuals put their money into it without even knowing what it is. They only know that many people are investing in it, and they don’t want to be the last ones to take advantage of it. They suffer from FOMO, which stands for “fear of missing out.” People make decisions depending on the opinions of others. There is a common conception that the last bandwagon to reach the summit is the most losers.

Gambler’s Fallacy is the last one on our list. According to Investopedia, it occurs when a person wrongly believes that a random occurrence is less likely or more likely to occur based on the outcome of a preceding event or chain of events. This logic is flawed since past events do not influence the possibility of certain events happening in the future.

Because each event should be considered autonomous and its results have no influence on past or present events, the gambler’s fallacy is wrong. The gambler’s fallacy occurs when investors believe an asset will lose or gain value after a series of trading sessions with the exact opposite movement. Also, traders commit this tendency out of their frustration. Since they keep losing on one side, they tend to choose the other side that keeps winning. It seems that it is our natural reaction as humans. That is why experts always remind us that a trader must always use their brains rather than emotions.

To Sum It Up

These are only a few examples of common cognitive biases that affect every trader and investor, particularly newcomers. These are natural human reactions. Knowing these biases can help you be more attentive to your investment and trading decisions. And you can control and prevent it. Beginner traders who cannot help themselves regarding emotion control seek assistance from professional crypto traders in trading platforms like BitiQ. 

Related Posts

Leave a Comment