Trading is a game between investors, and people who win the market for a long time are always a minority. Behavioral finance is an interdisciplinary subject between psychology and finance.
The research results of behavioral finance tell us that in the investment decision-making mechanism, human beings are far from "rational", but generally have multiple psychological biases. Investors who can understand, manage, and even use psychological bias will have a large advantage in the market game.
This sharing introduces 8 kinds of psychological biases that have the greatest impact on cryptocurrency investment decisions, analyzes their evolutionary sources, negative impacts on investment decisions, and feasible management methods, which is to explore how to make rational investment decisions fit in their hearts. .
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Finally, the feasibility of using the psychological bias of others to make profits in the market is discussed. The content shared is from the sixth lesson of the CAVI Encrypted Assets Investment Division.
The topic of this lesson is the harmony between people and people. The original intention of human beings is the human factor in the development trend of things, and it is the back of the human heart. The influence of investor group psychological factors on the cryptocurrency market is the content of the fourth lesson.
It’s about fortune to listen to it in the daytime. In fact, it is the role of group psychology. It can be said that the so-called market cycle is the resonance of investors' humanity. The people in this lesson refer to one person, that is, the investor himself, how to make wise investment decisions and your own heart.
Investor's individual psychology and group psychology are related, the more profound the understanding of individual psychology, the more accurate the grasp of the group psychology.
I. The theory of human nature of investment
The first five lessons have already covered the fundamental analysis, valuation and timing methods of crypto asset value investments. However, even if you learn an effective investment method, most people earn a lot less in market operations.
The fundamental reason is that successful investment ideas are anti-human, so successful investors must first observe human nature. To illustrate this point, we must first discuss what human nature is. In fact, understanding human nature does not require an inscrutable philosophy.
Starting from daily life, what things are you voluntarily, willing or even willing to overcome obstacles? What can only be done by external pressure or through internal struggles? Why do we like to do something naturally and not want to do something else?
Man is an animal. There is a common misconception that human behavior is the result of rational thinking, and other creatures are simple to avoid disadvantages. In fact, this is far from the case. Human behavior is not so rational, and the behavior of other animals is not simple.
For example, everyone knows that bees will swear, and because the bees have barbs that are stabbed into the skin and pulled out, they will bring out some of the internal organs, and the bees will not survive.
When I was a child, I was beaten by bees. At that time, I was mischievous. There was a honeycomb in the wall. My partner and I blocked the honeycomb with mud. I didn’t let the bees come out. As a result, the mud suddenly fell and the bees came out. I At the end, I ran or was smashed.
Everyone thinks, every bee, without the education of patriotism or love of home, can fight to resist the invaders. How is this done?
Now we already know that biological behavior patterns are shaped by natural evolution and are called evolutionary stability strategies. The deaf strategy is related to the bee's strategy of storing honey.
If an animal evolves a strategy of storing food, but does not have a protective strategy, it will give others a wedding dress, which is in a very disadvantageous position in the competition for survival. The human nature we are talking about is actually the evolutionary stability strategy of human beings.
Human behavior is governed by humanity (or evolutionary stability strategy) and rationality.
Humanity and reason are sometimes consistent and sometimes conflicting. The evolutionary stabilization strategy works through the endocrine system in higher animals. We are not clear about the specific mechanism of action, and can only be conceptually summarized as the reward center and the punishment center.
The reward center is responsible for generating a variety of pleasures, and the punishment center is responsible for generating negative emotions such as pain, fatigue, nervousness, anger, depression, jealousy, pain, and remorse. Modern society is rich in material, but more and more people have psychological problems such as depression.
The root cause lies in the modern way of life and work. It is not possible to provide us with appropriate psychological rewards for those who wear suits and tie. Let the hunters accustomed to tracking the prey on the grassland, live a nine-to-five life, sit in the plaid every day, face the computer screen and think hard, no problem is a strange thing.
The psychological problem of modern people is increasing. The core reason is that the living environment and the evolutionary stability strategy continue to conflict, leading to the reward center and the punishment center imbalance.
It is very difficult to use rationality against humanity. Typical examples include weight loss, gambling, and detoxification. There is also no endeavor to study hard and work hard. Although everyone knows that it is good for themselves, only a very small number of people can persist for a long time.
Why is it difficult to lose weight? Because in the past few hundred thousand miles, food shortages are the greatest threat to humanity. It can be said that human's most significant evolutionary stability strategy is formed around the fight against food shortages.
For example, hunger is unbearable, especially when children are hungry, adults are going out to face wolves and tigers and leopards, and they have to find ways to bring food back. The reaction to hunger is the greatest motivation for human survival.
In addition, when hunger, the human body will automatically reduce energy consumption, and the energy consumption of the same action is reduced by 20%. To lose weight, it is necessary to form a strong psychological and physiological mechanism against evolution, and the difficulty can be imagined.
But everyone thinks about it. Have you ever succeeded in losing weight in the people you know? Still, I know a few people who have successfully lost weight, all through sports, except for one is playing badminton, the other is through long-distance running.
Long-distance running is a magical movement. Most people don't like long-distance running. When they run for a few hundred meters, they sweat and flustered. But some people are addicted to long-distance running, and they don’t feel uncomfortable for a few days. There are hundreds of marathon events every year across the country, and large-scale events are full.
For example, the Beijing International Marathon in October every year, I have participated in one and a half horses before. Now 30,000 places are full marathons, and you need to draw lots to qualify. Why do humans love and hate long-distance running?
First of all, running quickly consumes energy. First, the center will punish the reaction. Tell you not to run with fatigue, and save energy. But running for a long time is the main way of human hunting, and it is an act that is conducive to human survival. Therefore, long-term persistence in running will stimulate the reward center and gain a sense of pleasure.
This is an evolutionary stabilization strategy that encourages us to stick to it and bring the prey home. So once the reward mechanism for running is triggered, it is no longer difficult to fight fatigue, running becomes a habit, or even addiction, then weight loss is a matter of course.
The psychological mechanism that triggers failed investment is rooted in human nature: rash, avoiding mistakes, greed, fear, and drifting are the psychological characteristics of human formation in the long-term evolution.
In the collection of hunting society, these mechanisms help humans adapt to the harsh living environment and achieve a balance of risks and benefits. However, the capital market is very different from the hunting society. It is still these evolutionary stability strategies that become obstacles for investors to reduce risks and increase profits.
So how can investors fight against these psychological mechanisms that have a negative impact on investment? This is what we are going to discuss in this lesson.
There is a survey of randomly selected adult males asking them to assess their ability to get along with others. The result is that 100% of respondents believe that their ability to get along with others is above average.
Of course, everyone thinks about it, this is impossible. Everyone is in the top 50%, then who is 50%? Similar surveys were conducted for different groups of people and were repeated numerous times with different topics.
Whether it's college graduates expecting their future income, entrepreneurs' estimates of their company's survival time, men's assessment of their athletic ability, driving skills or sexual ability, and women's assessment of their looks.
All surveys give the same conclusion that people are overly optimistic about their ability and future. At the same time, people's assessment of others is much more objective.
For example, according to the survey, college students are overly optimistic about their future income, the possibility of divorce, and the possibility of becoming a drunkard. However, if college students evaluate their roommates, the survey results are very close to the actual statistics of the society.
Overconfidence is a significant psychological feature of human beings. At present, all human beings in the world belong to the same subspecies of humans, Homo sapiens. That is to say, from the perspective of the evolutionary tree, human beings all over the world are extremely similar, and the genetic difference is minimal.
Homo sapiens originated in East Africa about 300,000 years ago, in hundreds of thousands of years. Hundreds of Homo sapiens are scattered in the grasslands and mountains of East Africa. Although they can make simple stone tools and use fire, this hairless cockroach is no different from the life of other social animals. It is difficult to see them. In the future, it will become the potential of the spirit of all things.
About 100,000 years ago, Homo sapiens began to step out of Africa and opened the way for global migration. Now we can draw a map of the migration of Homo sapiens and the time points of reaching the world based on archaeological evidence from around the world and research on genetic maps of local people.
Let's look at the big picture on the upper right. Homo sapiens reached the Near East about 60,000 years ago, reached South Asia 50,000 years ago, and reached Europe, East Asia and Australia 30,000 years ago.
It passed through Siberia, Aleutian and Bering Strait 15,000 years ago, arrived in Alaska, and continued to migrate south along the American continent. It took only 3,000 years to reach the southernmost tip of South America.
Finally, the Homo sapiens in Southeast Asia continued to spread along the Polynesian islands and spread to the Pacific islands in the last three thousand years of human history.
What do humans need to keep moving? Of course, there are reasons for environmental changes and survival pressures. But in places where early Homo sapiens passed, the upper limit of population density was generally not reached.
From ancient times to now, human beings have a desire to correspond to the land of Xu. There seems to be a resounding voice in the heart: on the other side of the mountain, on the other side of the sea, there is a fertile soil waiting for you. So you can also think of overconfidence as the selective bias of evolution.
If the sapiens' ability is not enough to adapt to the complex and changing environment, they will be eliminated when they leave the original habitat. After a long-term choice, the Homo sapiens should still live in East Africa and be a very conservative animal.
The survey shows that on average, men are more serious than women's overconfidence. Especially in the investment market, most investors believe that they can beat the market. It is not surprising that in the zero-sum game market, any rational investor who believes that he cannot exceed the average return should opt out.
Or we can change the angle. If every investor in the market has an objective evaluation of their investment ability, investors with the ability to be in the lower half should leave.
In the remaining people, the ability to not dominate should also stand. So repeatedly, only the most capable investors have reason to stay in the market, but he has no counterparties.
Every transaction in the market is represented at the price of the transaction. The seller believes that the price is overvalued, and the buyer is underestimated. If there is no confidence in the buyer and the buyer, the transaction will not happen. Therefore, if there is no overconfidence, there will be no capital market in the world.
Strictly speaking, overconfidence is a phenomenon. The psychological mechanism that causes people to be overconfident is mainly "confirmation bias".
Confirmation of bias, also known as falsification of prejudice or verification bias, means that when subjectively has some kind of opinion or opinion, people tend to seek or directly accept information that can support the original view, while ignoring those who may overthrow the original There is evidence of opinion.
So why do humans have a confirmation bias? In fact, a large part of the human psychological mechanism is to simplify decision-making, even if the basis for decision-making is not sufficient.
Many psychological experiments tell us that many insignificant factors have a profound impact on human decision-making. Simply put, the human decision-making process is very unreliable. But from an evolutionary perspective, quick and firm decisions are usually better than hesitancy.
Everyone knows that there is a famous Brittan priest in the history of philosophy. There is a pile of grass on the left and right sides of the scorpion, and it is about the same distance. This scorpion is completely rational, and it can't find a reason to eat which grass to eat first, so it starves to death.
Human beings live in an environment of accidental and unknown, making decisions every moment. There are many ways in front of the hunter. Should I chase the prey along that one? It is much better to make a decision with a certain correct rate and execute it with confidence.
In all human organizations, skeptics are the least useful and at the bottom. The top is occupied by a confident and convincing elite. Although the correct rate of elite decision making is not necessarily better than throwing coins.
But once they can convince the public with their own theories and beliefs, they will form a powerful force, crush all doubts and resistance, and push the wheel of history forward.
Third, negative bias
Negative bias means that negative information is more touching than positive information, and people feel more about loss than equal amount. Psychologists have done a lot of experiments and found that the impact of loss on people is roughly equivalent to 2 times.
Roughly speaking, the pain of losing 100 yuan is probably equal to the amount of 200 yuan. This is a very important discovery of psychology. It seems that human beings are a natural and depressed animal.
Why do human brains pay more attention to negative information, and negative emotions give people a stronger impact? I think it can be explained by the risk-asymmetry asymmetry.
For example, women who collected hunting tribes found a large number of mushrooms, but they did not know if the mushrooms were poisonous. Should they eat mushrooms?
The answer is obviously no, because even if the mushroom is not poisonous, the benefit of eating it is just a full meal. If the mushroom is poisonous, many people in the tribe may die.
For another example, a hunter is running on the grass to chase the prey. He found something in the grass a few meters ahead. It looks like a branch, but it is also like a snake. Should he stop to observe it?
A reasonable choice is of course to stop and observe, because even if there is only a small probability of being a snake, it cannot be careless. Today's management science has a sound theory of risk management, including how to quantify risks, prioritize risk response, and so on.
But when you finish, you will find that these are actually common sense, which have long been printed in our brains. Our ancestors don't need to calculate to know how to choose.
The BBC documentary "Human Planet" records an astonishing example of negative bias. The Kenyan Dorobo hunters are steadily moving towards the lion population that is rushing to eat. The lion was frightened by the unknown fear, and the wildebeest that was not easily caught was left to the hunter.
This example tells us that not only humans, but even animals have negative biases. Most of the lions have never had the experience of directly conflicting with human beings for the rest of their lives. So when the hunter approaches, the lion can't judge whether he is in an advantage or a disadvantage, and he chooses to escape when he is insured.
I don't know in which era, the Dorobo hunters found that lions have negative biases that can be exploited and developed into an effective hunting mode. The advantage of human beings is that they can sum up and pass on the experience, use rationally to restrain their own psychological biases, and use the opponent's psychological bias. Therefore, human beings are well-deserved spirits of all things.
But in the capital market, in most cases the risks and benefits are symmetrical. Even the space for revenue is much larger than the space for loss.
For example, in recent months, experts on various roads have begun to claim that Bitcoin will return to zero. This is a typical feature of a bear market.
But we compared the number of users of Bitcoin by an order of magnitude and more dispersed in 2019 compared to 2015. The risk of bitcoin zeroing is already very low. Moreover, the price of Bitcoin is more than 3,000 US dollars, and the room for increase is far more than doubled.
But in a bear market, investors are generally shrouded in negative emotions. Off-market funds are afraid to come in. Irrational investors are overly afraid of possible losses and still choose to throw at an already undervalued price level.
In such a market environment, we should use rationality to control our own negative biases like the Dorobo hunters, and use the negative biases of others to achieve the results.
Fourth, forced to sell
Let us talk about being forced to sell and being forced to sell is not a psychological bias. But it is closely related to psychological bias.
First, being forced to sell is caused by excessive buying caused by overconfidence. Second, being forced to buy together with negative bias is the main reason why the bear market is falling.
Let me talk about the famous allusion of the currency circle – the story of 480,000 brothers. This person opened a post in Baidu Bitcoin on January 28, 2014, saying that the family saved 480,000 yuan for seven or eight years to buy 100 bitcoins, with an average price of 4,800.
He said with enthusiasm in the post, "I look forward to making a big profit, buying a house directly for the full amount, and luckily changing my car. After two weeks, I have a profit, and I said that I will not sell in the short term. Unless it doubled, but soon, the price of Bitcoin fell to 2000. Someone in the post bar cheered him up, but more is ironic and ridiculed.
The landlord is still updating the post from time to time, mostly describing his own life status, such as how to lie to the fiancee and his parents, who to find money to make up for the loss of hundreds of thousands of yuan.
In the middle, the market once warmed up and rose back to 3,600 yuan. Many netizens are happy for him, but he still insists that Bitcoin can reach 4,800 yuan, one will not be thrown. The end of 2014 was the darkest day, and his account fell to only 190,000. "Stand up, don't think about it." A good friend comforted him.
At the beginning of 2016, Bitcoin picked up again and reached 3,000 yuan. After two years of persistence, he finally couldn’t help but cut his meat. "The coin was thrown, and the house was bought." He replied faintly in the post. After two years of ups and downs in the currency market, 480,000 became 300,000, and this ID has never appeared again.
Of course, everyone knows the following things. After more than a year after the 48,000-year-old brother cut the meat, the price of bitcoin rushed to the peak, and the maximum price of 100 bitcoins was 15 million. The failure of 480,000 brothers was not because he did not have a year.
I bought bitcoin with the money to buy a house, and I have been fighting with my family for more than two years. I don’t know anyone else. I can’t do it anyway. The reason for his investment failure was that the purchase was leveraged.
There are many forms of leverage, and the contract is just the most obvious one. Personal use of funds already invested in the expenditure plan is also leverage.
When the market is good, the scale of the company is expanding, the funds are springing up, and the ICO projects are one after another. The project parties are holding the new high ETH and they are all in the process of adding leverage.
Once the price reversed, everything went backwards. The strategy of making the fastest money was the fastest and fastest strategy.
The company began to lay off employees and shrink the scope of business. The fund was forced to liquidate, and the project side took the ETH, which is getting more and more worthless, to squat and throw it out, and hope that it will survive the winter.
The most profitable in the bull market is the most leveraged. They make an illusion of making money, one by one, and they feel that they are geniuses.
The most pitiful thing is that the newcomers who entered the game, the riches they heard are all wrong, and they feel that they are late, so they are even more lenient to catch up with others. They are the earliest and the deadliest in the bear market. That group of people.
Those who truly understand investment, he will understand a basic truth, the future is uncertain, there are many possibilities. Therefore, his fund allocation and position control will not only consider one situation.
Instead, adapt to several of the most likely scenarios and avoid significant losses if the prediction is completely wrong. Therefore, the allocation of funds to outstanding investors is not optimal for any single situation.
The inference is that in any market environment, the highest rate of return is not the investment master, but the courage of the courage. Their unilateral strategy happens to fit the market trend.
So here I give a counterintuitive investment principle: people who don't make the most money. Or don't try to make the most money.
So avoid being forced to sell, that is, don't add leverage. Forty-eight thousand brothers only buy 10 bitcoins. You don't have to live in the dark for more than two years, and you may end up earning 800,000. Regarding the allocation of funds for cryptographic assets, we will discuss them at the end of this lesson.
Fifth, the herd effect
In the 1950s, social psychologist Solomon Axi made a famous experiment. He gave the subjects two cards, like the one on the left side of the PPT, and then asked the three lines of the card 2, which one with the card. The line in 1 is as long as the line.
Even a child can easily tell which one is in the middle. Axi’s experiment is certainly not that simple. He looked for seven subjects to participate in the test, and colluded with six of them, deliberately wrong, saying that the right line segment in chuck 2 is as long as card 1.
After waiting for 6 people to deliberately make a mistake, ask the seventh person. In fact, only this talent is a subject, and others are experimental conditions. It is shocking that most of the subjects will agree with the previous six statements and make a clearly wrong choice.
There were two explanations for this experiment at the time. One explanation was social pressure, that is, the subject deliberately made a mistake in order to avoid embarrassment. The second explanation is that other people's opinions affect the subject's perception, which means that the subject really thinks it is, rather than intentionally lying.
So which interpretation is correct? Later, with the advancement of brain science, scientists came up with ways to answer this question. They scanned his brain with MRI when the subject responded.
If social pressure is said to be true, then the forehead responsible for dealing with social and rational thinking will be active before he responds. And if the whole process has nothing to do with social and rational thinking, then only the specific areas of the hindbrain that deal with vision are active. Through such an ingeniously designed experiment, the question was answered.
You may wish to guess the results yourself. The answer is that without social pressure, the subject made the wrong choice based solely on vision. To put it another way, the choice of the first six people directly affects the visual cognition of the seventh person.
We often say that seeing is believing, but in fact our vision is not reliable and will follow others blindly. This is the herd effect.
The name of the herding effect shows that this is not a peculiar psychology of human beings. So why do many animals, including humans, evolve the psychological mechanism of the herd effect?
There are two main reasons. The first is that the group does have more advanced intelligence in some cases than the individual.
Therefore, there is a concept called group intelligence. The most notable examples are social insects such as ants and bees. Although a single ant can hardly talk about wisdom, the ant society does work economically.
The effective market hypothesis is also related to group intelligence. Although the information held by individual participants is not uniform, it is obvious that the sum of the information held by the group is greater than the individual, so the asset price is generated by the group decision, and it is very difficult to overcome the market.
Similarly, the results of polls are often better than expert predictions. The forecasting market of the blockchain industry is to commercialize group intelligence.
On the other hand, there are still many situations in which the group's rationality and wisdom are far lower than the individual. The pioneering work of group psychology, "The Uganda" is to discuss such phenomena.
The second reason for the herd effect, in some cases, the choice of the group will naturally become the right choice. There are countless examples of this. Human beings are social animals, and individuals can hardly survive without society.
Therefore, in most cases, the congregation is correct. When an individual leaves the group, it will produce a feeling of tension and loneliness. This is the evolutionary system that tells us that a single individual is very weak and faces a huge risk of survival.
So you can see that the herd effect is not always harmful. Like other psychological biases, it provides additional survival benefits in the long-term evolution of humans, so it survives.
Only in certain circumstances, such as in the capital market, the psychological mechanism affects the quality of investment decisions, so it becomes a psychological bias.
The benefit of the flock is a special psychological bias. Its role is not to produce a specific influence, but to amplify the influence of other psychological errors. He can make the over-optimistic or negative bias in the crowd mutually reinforcing. The greater the density of the community, the closer the association, the more significant the herd effect.
South Korea has the strongest herd effect in the four major communities of China, the United States, Japan and South Korea. Therefore, the bull market will focus on South Korea, observe the changes in the Korean market's sentiment, and predict when extreme optimism will reverse. Of course, perhaps the next round of bull markets will involve communities with stronger herding effects.
Another thing to note is that the herd effect will be used deliberately. The dealer disguised as a head sheep and led the flock to a preset trap. We say that the herding effect is an amplifier of psychological bias, the price manipulation uses the human's FOMO psychology, and will also introduce demonstrations and samples to drive ordinary investors into the game.
The herd effect is the cause of losses for ordinary investors and a tool for the profitability of outstanding investors. First of all, you have to understand that in any market, the people who make big money are a minority. The definition of the rich is more rich than ordinary people.
So logically speaking, the rich can only be a minority. The inference is that you can never make big money because of your secular. If your goal is to make a lot of money, you have to be a special one, at least for some key choices that are different from most people.
That is to say, it is not easy to do with the flock. This is of course not easy to do. Because human nature opposes this, you will fall into loneliness, loneliness and anxiety, as if a person is lost in the wild. But I want to tell you that these are the inevitable experiences of outstanding investment.
Adhering to independent thinking and upholding one's own judgment is the only way to invest and get rich. But at the same time, you should understand that unlike everyone else's choice, it is likely that you are mistaken. Therefore, maverick is not an end in itself, but in the most certain circumstances, choose to become a minority.
Sixth, random interference
Since the capital market is a complex system with many participants, the short-term trend of asset prices can be considered random.
But humans are always accustomed to summing up and discovering causal laws through phenomena, especially between causing causality between human actions and subsequent phenomena. We call them causal biases. Therefore, randomness can interfere with our perception.
In fact, not only humans have causal errors, even animals. BF Skinner, a psychologist at Indiana University, did a group of experiments with pigeons and published the famous paper "The Superstition of Pigeons" in the Journal of Experimental Psychology in 1948.
This experiment is like this, putting the hungry pigeons in a cage and giving the pigeons some food through the funnel every once in a while. After repeated iterations, the pigeons invented a set of actions to pray for food, like dancing.
Although the appearance of food is not related to dance, the pigeons insist on their “belief” and tirelessly repeat the way they think they are effectively praying.
Nassim Nicholas Taleb, the author of Black Swan and Anti-Fragment, told a story of his own. When Taleb was young, he was a trader at Credit Suisse First Boston. One morning he met a taxi driver who didn't know which country he was. He couldn't understand how to give him directions. He finally went over.
Taleb entered the company from the usual entrance, and on that day his market record was particularly good, earning a vote. The next day, he wanted to find the driver who could not understand English, and he intended to give him a considerable tip, but unfortunately did not find it.
He asked the taxi to put him in the usual entrance, on the elevator, he noticed that he was still wearing the tie with coffee stains yesterday. Suddenly, he realized that he was caught in a causal bias and unconsciously tried to repeat everything yesterday.
This story is written in the book "The Random Strolling Fool". "The Random Strolling Fool" is much thinner than "Black Swan" and "Anti-Vulnerability", and it is more readable, so I recommend everyone to read this first.
If you look at it, go see "Black Swan" and "Anti-Flaw".
The only shortcoming of "The Random Strolling Fool" is that the translation is not good. The translator is obviously unfamiliar with the financial market. Many names are mistranslated, and even the hedge funds are translated into hedge funds. The title of the book is also translated, "Fooled by Randomness" should be translated into "by randomness." Let's make a look.
Let us talk about the characteristics of a random phenomenon. There is a professor of statistics. In order to let students understand what is random, they will play a game in the first class of each school. The professor asked each classmate to imagine throwing 100 coins in a row and writing what they thought was possible on paper.
At the same time, pick a classmate who really throws 100 coins and records the results. The professor will leave the classroom during this process. When everyone handed in the results, she went back to the classroom and took a look at it, then quickly guessed which one was the real coin toss.
For many years, no guessing was made. How did she do it? In fact, it is very simple. The professor will pick the result of consecutive words or the longest head, which is the result of real coin flipping. People always think that chaos is random, but the real randomness seems to be less random.
It is precisely those sequences that look a bit regular and are truly random results. Let me say an example. If you look at the clouds often, you will find clouds from time to time with something, even someone's face.
But you can try and think about something in advance, like a printer or an owl. I dare say that even if you look at the clouds for a lifetime, you won't be able to touch the cloud with the shape of the object you expected.
This is a combination problem. A cloud in the sky is similar to one of the world's innumerable objects. The probability is actually quite high, but the probability of resembling a particular object is almost zero.
The most random phenomenon that interferes with investors is the price trend. There are countless investors trying to find a certain pattern through the chart. This is equivalent to staring at the clouds every day, trying to sum up the rules and predict the shape of the clouds tomorrow.
Of course, I am not saying that the price movement of cryptocurrency is completely random. After all, the cryptocurrency market is not a completely effective market.
In July last year, two economists at Yale University published a research report entitled "Risk and Return on Cryptographic Money", using statistical methods to prove that the price of cryptocurrency has a time momentum effect. Simply put, the price has some inertia. .
A team that does quantitative trading can develop trading strategies based on momentum effects and arbitrage. Of course, the result of full arbitrage will make such a specific law disappear. The ineffectiveness of the market is not the amulet of the so-called technical graphic school, because a large number of studies have shown that the human brain has not evolved statistical power.
There is no difference between trying to visually discover the law of asset prices and praying for food with pigeons invented by themselves. There is no randomness in human nature, only cause and effect. So we will try to find a reasonable explanation for all the phenomena.
Every time the market suddenly rises or falls, what will investors pay attention to? What happened? The media will present some plausible explanations to determine the events that occurred on the day or even some days ago as the cause of price changes. In fact, most of the time, there is no direct cause for changes in asset prices.
In other words, the market does not need new information, only the game will cause asset price fluctuations.
Human obsession with causality is also produced in evolution. The causal illusion plus overconfidence creates a hindsight. Almost every investor, including myself, is used to talking about investment history like this: "In fact, I knew… but because of…how, how?"
Anyway, my judgment is correct, but because of external factors, it leads to losses or low profits. Quantitative trading has a huge improvement over technical analysis, which is back testing. Perform trading strategies against historical data, at least for historical data, backtesting can get objective conclusions.
Randomness can also seriously interfere with investor sentiment. Suppose an investment has an expected rate of return of 15% a year and an annual volatility of 10%. This is a fairly good investment with a probability of a 93% profit for 1 year.
But if you observe it once a month, the probability of seeing it in a profitable state is only 67%. Then if you observe it every day, every hour or even every minute. This investment is only profitable when it is a little over 50%.
In other words, nearly half of the observations will see it in a state of loss. So can you still be sure that it is a good investment? And as I said before, negative emotions have a positive impact on people, with a 2 to 1 quantitative relationship.
That is to say, once a month, the pain caused by the happiness and loss caused by profit is roughly balanced. The more frequently you observe, the greater the psychological loss. And strong negative emotions encourage investors to make irrational investment decisions and sell good assets at too low a price.
The investment is converted to bitcoin, and the expected annual rate of return is very high, about 100%, but the annual volatility is higher, exceeding 100%. Then every time you look at the market, the probability of profit and loss is about the same.
Although it has made money in a few years, in the process, investors will continue to face negative emotional effects, which will reduce the quality of life in these years. We imagine that we have an emotional account, happiness is income, and pain is expenditure.
If you invest in cryptocurrencies and often stare at the market, emotional accounts are losing money regardless of whether the final fund account is profitable. If we focus on the process of life rather than the amount of wealth, then those who cannot break free from random interference should stay away from the capital market.
In 2017 and 18 years, many investors in the currency circle were caught in market anxiety. Call it a disease, that is, it is already a psychological illness.
The typical symptoms are: I feel anxious when I don't look at the market for a while. Some people eat and go to the toilet to watch the market. I have to take a look at the night and night. When I look up, I can’t sleep, I fall, I can’t sleep. Do not rise or fall, or stare, afraid to fall asleep and miss the ups and downs.
Of course, there is no intention to work, no intention of entertainment, and a significant negative impact on life. The bear market is a special medicine for market anxiety. Most patients have now recovered, waiting for the next round of bull market to relapse.
So is there any way to actively treat market anxiety? There is no such thing as no way. The basic idea is to divert attention. Unloading the mobile phone software of the market, reducing the contact with people or things that may be associated with the market, doing things that you usually do but have no time to do.
For example, playing games, watching soap operas, and reading novels. I recommend two sets of books to students who love to watch martial arts novels. One is the old book "Da Tang Shuanglong Biography"; the second is the new book "Snow in the Snow".
Both sets are very exciting to write, and it makes people want to stop reading. And they are all five or six million words of great work. If you read two hours a day, you can probably watch it for two months. If you are not serious enough, you can cure it.
If you can't get rid of anxiety, you can learn from Apple's co-founder, Wozniak. Wozniak said that when Bitcoin is at a high price, I don't want to be the kind of person who always pays attention to price changes.
I don't want to be confused with this kind of happiness, so I sold it all and got rid of it. If you agree that life is a journey, the key is to see the scenery and the mood of watching the scenery, then Wozniak's choice is taken for granted.
7. Consensus bias and framework effect
Let's talk about consensus bias. If you do a small survey, what do you think of the proportion of students who use Cphone in this course? Send your answer to the monitor, and tell the monitor, you use iphone or Android.
Although we have not started the investigation, the results can be predicted, the use of iphone students, the estimated use of iphone will be higher than the use of Android students' estimates. The reverse is also true.
Similar experiments have been conducted on many subjects in many groups, and the results show that people tend to think that others are similar to themselves. This is the consensus bias.
As mentioned above, the decision-making process of the human brain is far from being rational, but it is based on incomplete information and even irrelevant information to make quick and even arbitrary decisions.
Psychologists have discovered several ways in which humans can make quick decisions, including availability, representation, and anchor points. Because of the limited time, we will not talk about it. These rapid decision-making mechanisms can lead to consensus bias.
Consensus bias has the greatest impact on investment decisions against the trend. For example, the current bear market environment, the negative news in the industry is more than positive news, the price is also falling.
At this time, you took part in the CAVI course and got a deeper understanding of the ins and outs of the cryptocurrency. It is possible to make a judgment and add a position against the trend. But the price of BTC will not rise because you are optimistic, nor will it fall because you are not optimistic.
Overcoming the consensus bias is to clearly understand that the people bought in the bear market are a minority. So don't worry, now is far from the stage of grabbing chips, you should slowly choose to add positions.
Let us look at the frame effect again. People's risk appetite is not consistent. When it comes to income, people show risk aversion; when it comes to loss, people show risk seeking.
For example, let's do a small experiment, so that you can choose between 3,000 yuan and 80% probability to get 4000 yuan. Many people will choose a safe 3000 yuan, although the expected return of another option is a higher 3200 yuan.
When people invest, they have two kinds of thinking frameworks. The thinking framework for obtaining income is very conservative. They always want to avoid risks and settle down. The framework for avoiding losses is very radical and willing to take risks. To put it bluntly, you always want to turn it over.
In the cryptocurrency market, the framework effect is very significant, that is, the bull market is always hesitant, not afraid to take risks, and the position is too low. In the bear market, the currency of the hand is depreciating day by day, but always wants to turn it over. It always says how much it will be sold next time, but the market for the bear market is going down the wave. The result is that the more the set is, the more dead.
At this time, someone will use value investment to comfort themselves, saying that Buffett’s stock is not sold for decades, and we also insist on value investment. In fact, it is only psychological comfort, the influence of the frame effect, and has nothing to do with value investment.
When we think about the cryptocurrency investment in the fourth lesson, it is the notorious "chasing up and down". The same chasing up and down, masters and novices are using. The difference is that the master is a quick step, that is, can restrain the influence of the frame effect.
When others hesitate to follow, the master has already shot, and when others hesitate to sell, the master has cleared the position. So summed up is six words: take advantage of the trend .
Eight, endowment effect and halo effect
Let us introduce a top scholar, Richard Seiler. He is a professor at the University of Chicago, a winner of the 2017 Nobel Prize in Economics, and a representative of behavioral finance.
Richard Siller may not think that his major is behavioral finance. He studies a broader field—to study how people make decisions, especially how to make decisions that maximize profits or logic that cannot be explained. Out, or called irrational decision making.
If these decisions are about investment, it is the research area of behavioral finance. It can be said that the sixth lesson of our course is to discuss the research results of behavioral finance and the application of crypto-asset investment.
Richard Sailer did a very famous experiment. He found a group of college students and randomly divided into two groups. The first group of students each received a three-dollar mug in the market, and the second group received $3 in cash.
He told these students that they were free to trade. According to the economic man hypothesis, the mug has a certain utility value for everyone. This utility value is either higher than $3 or less than $3. Since the grouping is random, there should be about one and a half of the mugs being traded.
But the real result is not like this, only a few mugs are traded. The average estimate for a set of cups for the mug is $4.50, while the average estimate for a cup for cash is only $2.25.
The same experiment has been carried out many times in different ways by different people, which proves that people value their own things more. Or if a person owns an item, he will evaluate the value of the item much more than before. Sailer named this phenomenon as an endowment effect.
Let us talk about the halo effect. The halo effect, also known as the "halo effect", refers to the impression that when a cognitive person forms a good or bad impression on a certain characteristic of a person, he also tends to infer the characteristics of other aspects of the person. . In essence, it is a cognitive bias that is partial.
This kind of strong perception of quality or characteristics, like the aura, diffuses and spreads around, thus concealing other qualities or characteristics, so it is called the halo effect.
The most striking example is that the promotion of goods is endorsed by stars, because the stars have been widely recognized, and the goods he speaks are more likely to be recognized by the public. There is also a writer or painter who, once famous, has never published a manuscript at the bottom of the box, or the painting is worth a hundred times. This is the effect of the halo effect.
There is often a halo effect between lovers. When two loved ones are together, they will feel that both sides have advantages and no shortcomings. This is when I first liked a person, but I just liked the advantages of one aspect of the other party's performance. Then, after the expansion of the halo effect, I felt that the other side was full of advantages.
The halo effect causes investors to buy crypto assets for reasons unrelated to investment profits. For example, because of the recognition of the values conveyed by an encrypted asset, or the love of the founder and even worship. And the endowment effect will make investors more and more fond of the crypto assets they already have.
The use of the endowment effect by the issuers of cryptocurrencies can be described as the peak. They pass the pass created by the air to investors, allowing investors to recognize the value of the certificate because of their possession. How can we control the halo effect and the endowment effect on investment?
The method I recommend is to write down the reason for the purchase before each position is opened. First of all, we must examine these reasons. Is it reasonable and rational? We should invest in a certain encrypted asset. The reasonable reason should be to predict its future value preservation or appreciation. Do not mix social ideals and personal preferences to avoid interference from halo effects. .
After the completion of the opening of the warehouse, you should take a look at the reasons for the opening of the warehouse every time. If an investment logic has been implemented, or if the forecast has failed, it is necessary to sell the assets without hesitation to avoid interference with the endowment effect. Do not participate in airdrops, do not lick wool, and avoid being used by people because of small losses.
In a word, don't fall in love with your encryption assets. They are just tools to preserve and increase value, and they are not worthy of feelings.
IX. Management investment psychological bias
We have already explained a number of psychological errors that have a significant impact on investment, and have proposed some solutions in a targeted manner. In this section, we systematically sort out the methods of managing investment psychology.
First of all, the theoretical basis is very interesting. It is interesting to open the door to behavioral economics. Two psychologists, Daniel Kahneman and Amos Tversky, Kahneman won the 2002 Economics Prize. Tversky failed to win the prize because of his early death.
After a lot of experiments and research, these two psychologists revealed that the human brain has two different cognitive systems. Kahneman is called System 1 and System 2. I prefer to use the name of Richard Sailer, the intuitive thinking system and the rational thinking system.
Intuitive thinking is done by the older parts of the brain and can be seen as an animal part of the human brain, physically located in the back of the brain. Rational thinking is the product of late evolution, unique to Homo sapiens or humanoids, and physically located in the front of the brain.
The characteristics of the two sets of cognitive systems are summarized in the table at the top right. The characteristics of the intuitive thinking system are: uncontrolled, effortless, associative, fast, unconscious and skilled; the characteristics of the rational thinking system are: controlled, laborious, deductive, slow, conscious, and in accordance with the rules .
In daily life, most decisions are made by an intuitive thinking system. The rational thinking system has a big drawback, that is, conscious use can make people feel tired. For example, I usually read books at night, and my wife watches soap operas. Sometimes I will ask her, why don't you see something useful? She usually answers: Fei brain.
In fact, I fully understand her feelings, because I also love to read novels, reading novels is very cool, not even tired of watching for hours. Reading economics, finance, and investment books is far worse. If you look at the hours, you have to stop and slow down.
The characteristics of the two-day thinking system, there is no time to talk too much. We focus on how the two systems work together to make informed investment decisions. First of all, there is a misunderstanding that it is wrong to think that intuitive thinking can only make simple decisions.
The advantage of an intuitive thinking system is rapid decision making. Even I think that far more than that, the world's greatest inventions, the most beautiful verses, and the noblest actions come from intuition, from the inspiration of a glimpse.
When I was a child, the TV station interviewed heroes and often asked: What did you think of at the moment of the millennium? The host expected the hero to answer the teacher's education, the cultivation of the motherland, and so on. Although I am a child, I feel that this problem is very ridiculous.
An emergency is just a moment, how can you think of a bunch of things. But when I grow up, I understand that people can change and strengthen the intuitive thinking system through rational thinking systems. Without the hard work of the cold window for many years, there is no such thing as a wonderful hand.
Only by accepting the subtle influence of brave dedication, the key moments will not be animalized to avoid disadvantages. Rational thinking The strengthening and transformation of intuitive thinking, the most typical example is driving.
Learn to use rational thinking when driving, accelerate the deceleration and turn to see traffic signs, you must think consciously. When I learned to drive, this complex set of perceptions and decisions was almost completely passed to the intuitive thinking system. You can drive while you are chatting or thinking about things.
The same is true for investment. We read books, listen to classes, communicate with others, and reflect on our investment experiences. We all use intuitive thinking to train intuitive thinking. So there is a word called internalization, which is such a training process. The purpose is to improve the quality of decision-making in intuitive thinking.
At the same time, we cannot put the investment decisions given by intuitive thinking directly into implementation. Instead, it should be handed over to rational thinking for testing. Rational thinking should identify the impact of psychological bias on decision-making, and then adjust or even negate the decision.
There is a situation where reasoning clearly knows that the decision is wrong, but it cannot be controlled and must be done. This is the question of the unity of knowledge and action. I think the problem is not rational, but intuition is too paranoid. The solution is to learn and reflect, and train intuitive thinking.
The highest realm is not the integration of knowledge and action, but all rational thinking is internalized as intuition, and the decisions made by intuition do not need to be negated and adjusted. Therefore, Confucius said: I have five to succumb to learning, thirty to stand, forty to not confuse, fifty to know the destiny, sixty to be pleasing, and seventy to do what is desired.
From the heart to what you want, there is no conflict between rational thinking and intuitive thinking. It is the highest state of cognition and decision-making.
Some students may think that since the intuitive thinking system will be affected by many psychological errors, it is only necessary to make rational investment decisions. Can you design tools such as scoring matrices and checklists, step by step to fully apply data and logic, and draw conclusions that are not very reliable?
I am very opposed to this approach because rational thinking is rule-based and it can only govern linear models. The capital market is a complex nonlinear system, and our human brain is a nonlinear supercomputer.
If we give up intuitive thinking, we only use a rational thinking system. It's very stupid to use a calculator to solve complex problems without using a supercomputer.
There are also investment research reports and so-called project ratings, all trying to use an oversimplified linear model, based on a large number of invisible or explicit assumptions, trying to measure or even predict complex nonlinear systems, of course, can not be reliable result.
Therefore, we should look at investment research reports and project ratings as part of learning and training. If you make a decision directly based on the conclusions of the investment report, it is better to throw a coin to make an investment. Tossing a coin is more trouble-free and the result will not be worse.
Summarize the best way to collaborate between two sets of cognitive systems. The rational thinking system trains the intuitive thinking system, and the intuitive system produces decisions that are given to the rational system for screening and adjustment. Score tables and checklists should be used as tools for reviewing decisions, not as tools for making decisions.
Although the realm of what is desired is not out of reach, but there is only one way to improve cognition, that is, the reciprocating cycle of learning, communication, practice, and reflection, there is no shortcut.
X. Management investment is psychologically extreme
For investment psychological bias, it must be identified, accepted, and then managed. Identification is the ability to effectively find out your own psychological bias. After you have learned the meanings and typical phenomena of various psychological errors, it is easy to see the psychological bias of others.
But this is not enough. The key is to be able to identify your own biases. To do this, you need to be familiar with all kinds of psychological errors. The content of this lesson can be listened to repeatedly, and the recommended reference books are taken seriously.
Then there is a rethinking of investment decisions and thinking from different angles. You can make a card with a psychological bias. When you have the urge to trade, look at the cards one by one and think about whether you are affected by psychological errors. Of course, examining your abilities is an art, not a science.
For example, every decision should have strong self-confidence to support, especially counter-cyclical decisions. There is no clear boundary between self-confidence and overconfidence. Understanding overconfidence is to realize that the future is open and random, and that any prediction, no matter how well-based, cannot be 100% accurate.
Of course, the investment does not require 100% accuracy. It is expected that the rate of return will be high enough. At the same time, consider how the forecast will go wrong and whether the result can be tolerated. By the way, a topic has recently been publicly stated that it can predict the market 100%.
Those who claim to be able to accurately predict the market are either stupid or bad, and are likely to be stupid and bad. Such people have, are, and will have in the future. I believe that CAVI students will not be confused by such ridiculous lies.
Being able to identify psychological biases should also accept psychological biases, which is a special emphasis in the CAVI curriculum. So we spent a lot of time talking about how psychological errors came about, and why they used to benefit human survival and reproduction.
To talk about this content, I hope that everyone will recognize the so-called psychological bias, not that we are making mistakes. It is part of the survival experience of our species, which is not applicable in the capital market. But the speed of biological evolution cannot be eliminated in the short term. And these experiences still apply in many important ways.
"Lu Rong's Behavioral Finance" class is doing very badly in this regard. After listening to her class, I was afraid that I would have a nightmare. I was a Shanghai woman who was stunned by the market. It was not right to recite me all day. It was not right. Anyway, everything was wrong.
Lu Rong’s class is to tell you repeatedly, how you do it is wrong, only rational talents will not make mistakes. This is completely misunderstood behavioral finance. Behavioral finance means that the rational person hypothesis of mainstream economics is not established. If the mistake is wrong, it needs to be corrected, not that human beings are wrong.
It’s like your wife bought you a pair of shoes. As a result, you can’t wear it. Your wife said that according to your height, you should wear this size of shoes. If you don’t wear it, your feet are wrong. You can agree with this statement. ?
Therefore, we emphasize that we must accept that we must tell you that these psychological errors are too normal. Every investor has it, and it is not normal. So managing psychological bias does not mean that I am stupid, I want to be wise. But I know that investors are like this, I am more sensible than the average person.
Conversely, if you think that psychological bias is a flaw, you need to remove it, suppress it, and it will reappear from time to time. Then you will feel futile, exhausted and desperate, and even have psychological problems.
After accepting the acceptance, we will talk about how to effectively manage the psychological bias. In the past when we explained psychological errors one by one, some specific methods have been given. Now we have summarized these methods into three categories.
The first category is the compulsory law. Everyone looks at this picture, which is the story of Homer's epic Odysseus. On the way back to the home after Trojan's war, Odysseus had to go through an island. The sorceresses on the island had sweet voices that could seduce all mortals and make the fascinating bones become a bone.
Odysseus wants to hear the beautiful voice of Seymour. So he stuffed his partner's ear with wax and ordered them to tie their hands and feet to the mast. When they drove through the island, the singing of the sable banshee really aroused the strong desire of Odysseus, and he struggled. When the partners saw it, they came over and tied him tighter, and finally they passed the test.
The so-called coercive method is the method of restraining oneself with external forces. For example, if you have established a long-term position and you are worried that you are shaking in the process, you can let the secret of the transaction link let your lover know and tell her how to restrain you.
Internalizing rationality into intuition is not something that can be done overnight. As long as unscrupulous transactions can be avoided, the mandatory law is worth considering.
The second type of method is called boosting , which is used to boost the word. English is nudge, which is nudged by elbow, which means reminder, or guide. The most classic example is the urinal on the map.
It is an airport in Amsterdam. The toilet at the airport has a headache. It is that men's urination often spills out and it is very troublesome to clean. Later, someone came up with an idea to draw a fly in the middle of the urinal, which is the little black spot in the picture.
Men who see this fly pattern will subconsciously aim at the shot, the effect is very good, the amount of urine splash is reduced by 80%, and the cost is extremely low.
Boosting is the use of people's general psychology, making it easy, easy, and easy for people to make reasonable decisions, making unwise choices troublesome. This respects both the right to choose and the proportion of rational choice. Most of the specific methods I mentioned earlier can be classified as boosting methods.
The third type of method of managing psychological bias is called to try. People are set up for their own roles. For example, we are a kind father at home and a reliable partner in the startup team. The role will imply which of our actions are good and which are bad, so people will influence us in turn.
People can help us consciously call some psychological mechanisms, just like running to lose weight. Find and use the humanity that has a positive effect on investment to overcome the negative impact on human nature. Of course, people can't be too far apart from the real situation. If the difference is too far, it will cause people to collapse.
People have inadvertently let me avoid investment losses. In the first half of 2017, Yanjiao house prices rose rapidly. Because there are a series of substantial benefits, such as the integration of Beijing-Tianjin-Hebei and the sub-center of Tongzhou, the three counties are included in the unified plan, and the subway Pinggu line is planned to pass through Yanjiao.
I judge that Yanjiao's housing prices will continue to rise because Beijing strictly controls the population. Buying a house in Yanjiao is the only realistic choice for a large number of young people working in Beijing. I also went to Yanjiao to see the room. But suddenly I thought about why I want to make such an investment.
I bought a house and couldn’t hold it. After a few years, I sold it to a young man whose economic conditions were far worse than mys. Is it interesting to make money? Therefore, there was no purchase of Yanjiao's house. After a few months, Yanjiao introduced a strict purchase restriction policy, which blocked the investment in real estate speculation and the house price plummeted.
At the time, although there was no clear person, it was still a bit moral, and thus avoided investment losses. To give another example, the wavelength has recently been engaged in BTT airdrops, which will push up the price of TRON, and I will not participate.
Just like a neighbor telling you that the supermarket next to you is sending eggs, each person can line up for free to receive two, will you go? If you go, you will find yourself in the middle of the aunt. Of course, I don't despise my aunt, but I don't want to live like that. And whether it is in the supermarket, roadside or cryptocurrency market, it is not uncommon for greed to eat big losses.
After a long period of thinking, I found a person who helps guide the decision of a reasonable investment, that is, a hunter. We will elaborate on how to use the hunter's people to make supplementary investment decisions.
XI. Encrypted assets and funds ratio
Based on the knowledge of behavioral finance, we give an investment practical tool, the formula of the proportion of capital allocation of encrypted assets. It is to help you calculate how much money you can configure to invest in encrypted assets. The configuration ratio should have a suitable amount. Too high and too low are not good.
For more than 90% of investors, they have not entered the crypto asset market, so it is 0 configuration. This ratio is too low, and the reason has been discussed repeatedly. For investors who have entered the crypto-asset market, the proportion of funds allocated is often too high.
Students in the CAVI program generally fall into this category, so the formula we present here is to calculate the upper limit of the cryptographic asset allocation.
Why is the proportion of encrypted asset allocation not too high? Didn't the bitcoin have hundreds of thousands of value-added space? More value-added potential than all stocks, bonds, and real estate.
There are three reasons for setting an upper limit on the investment ratio. The first reason is precisely because the space for crypto assets is very large. Even if you only invest tens of thousands of dollars, if your understanding of the market is correct, the operation is sufficiently disciplined.
After 10 years of investment, tens of thousands of pieces are likely to become tens of millions. If your perception of the market is wrong and you can't control the instinct's conditioning, even if you put in a few million, you will lose a few years.
Since it is to spend money to buy lessons, why do you spend a lot of money? Achieving sustained investment returns is a process of cognitive improvement. Putting more money into the market does not speed up the process, but it can also be counterproductive.
That is to say, the second reason why the configuration ratio should not be too high: the higher the proportion of the configuration of the encrypted assets, the stronger the psychological condition reflection, and the more difficult it is to control. The relationship between asset allocation ratio and cognitive rationality is like the relationship between martial arts and Buddhism as mentioned by Shaolin Temple in the Tianlong Ba Bu.
The purpose of martial arts and Buddhism is to contradict each other, and to practice hard and painstakingly, but not to use the Dharma to resolve and restrain the anger, and ultimately can only be ruined. Then investment cognition and investment methods have not been internalized into strong rationality. Excessive asset allocation ratio can easily lead to imbalance of mentality and make wrong decisions.
In addition, we have said in this lesson that the most sad reminder in the market is forced to trade. The reason that individual investors are caught in forced trading is that the proportion of funds allocated is too high. Even with leverage, the configuration ratio exceeds 100%. Once in the wrong direction, in the situation of forced trading, then strong cognition and rationality can not play a role, can only watch others take your bloody chips.
Every bear market, as prices continue to fall, there are waves of investors forced to sell out, many people fell before dawn. So the configuration on the crypto assets should be all the money that will not affect the hard expense plan. Never put yourself in a position to be forced to trade.
The empirical formula for the allocation ratio of encrypted assets is to determine the upper limit of asset allocation using the investment life of BTC. The principle is that the crypto asset market is very unique, although operating experience in other capital markets, especially in the stock market, is helpful in understanding and adapting to the crypto-asset market.
However, other investment market experience cannot be fully applied. If you have just entered the crypto asset market, it is the easiest time to lose money. It is very dangerous to use a large part of the money to make a deal, and often it is full of positions. Then it is a wise choice to use a small percentage of funds to explore practice.
When your knowledge is in place, no additional funds are needed. Because the average yield of encrypted assets is high, the proportion of total assets will naturally increase. At that time, what you should consider is to redeem a portion of the funds from the crypto assets, on the one hand to improve life and on the other hand to spread risk.
At this time, your total wealth and ability to control wealth are growing at the same time. The ups and downs of the amount of money will not seriously impact your work and life. This is the third reason why you don't have to over-provision your cryptographic assets. That is, the simultaneous growth of cognition and wealth.
Specifically, this formula is: the proportion of crypto assets in all investable gold, lower than the number of years of trading BTC, multiplied by 10%. For example, if you invest in BTC for less than a year, then the allocation ratio should not exceed 10%.
If you start investing in Bitcoin in 2015, the allocation of encrypted assets should be less than 40%. Some students may ask, I have been there for some time, bought a lot of encrypted assets, but did not buy BTC, how should I count?
I think so, if you have been trading in the crypto asset market for a while, but you have not been configured with BTC. So with a high probability, your understanding of asset allocation and cryptographic assets is very different. My suggestion is not to trade first, repeat the CAVI course several times, then start from BTC and re-enter the game.
I said at the opening ceremony of the course that every sentence and every conclusion in the course is not 100% correct. If 100% is correct, it usually has no practical significance. This configuration ratio calculation formula is not from the mathematical proof, it is my experience in the encryption asset market for six years.
So since you are studying this course, I hope that you will seriously think about why I have to mention such a calculation formula. Listening to it will be less risky, less mistakes, and less tuition than listening. If we rationally recognize the formula, we still can't help but over-allocate the funds, indicating that there is still a big gap between knowing and doing.
Then there is not enough loss. I think the worst case for investing in the crypto-asset market is not a loss. The worst thing is that an unacceptable loss has occurred, and you have given up on investing in crypto assets. It was early in the morning, and I rushed to the evening to miss the best investment opportunities in my life. This situation is not uncommon.
Twelve, use the psychological bias of others
Because psychological bias is the commonality of human beings, group bias will be formed under the driving of the herd effect, resulting in asset mispricing. How can we say that the price of an asset is wrong? The basis is that the arbitrage space is generated.
The most obvious example is the same trading pair with a spread between different exchanges. The efficient market hypothesis is based on rational human assumptions, but in the 1950s, Herbert Simon proposed that human beings are bounded rational theories, that is, people are not completely rational in economic decision-making, sometimes rational and sometimes irrational, The situation is rational and some cases are irrational, thus challenging the effective market hypothesis.
Herbert Simon is an extremely rare generalist. He participated in the famous Dartmouth conference and was one of the founders of artificial intelligence. He took nine doctorates and was not an honorary doctor. And in my impression, Herbert Simon is the only one who has both the Turing Award and the Nobel Economics.
The efficient market hypothesis can't refute bounded rationality, but its proponents suggest that although individuals are irrational, their irrational behavior is like noise, which can cancel each other out, and therefore has no effect on the overall market. When we learn the knowledge of behavioral finance, we know that this is not right.
Because human irrationality is not a random noise, but an inherent psychological mechanism, and can be enhanced by the herd effect. Therefore, the group's psychological bias can have a significant impact on the market.
The second response to the efficient market hypothesis is that even if irrationality causes mispricing, there are arbitrageurs in the market that arbitrage for mispricing and return prices quickly, so the market is still effective.
You see how stubborn supporters of effective markets are. Investors with real-world experience in the capital markets often see mispricing, but they turn a blind eye. The faction represented by Eugene Fama has occupied the mainstream position of economics for a long time.
If a theory cannot provide a reasonable explanation for a large number of phenomena, and there is no predictive power, even if it is logically or mathematically complete, what is the point? I feel that such a theory is not science at all.
Ok, let me stop the spit on the efficient market hypothesis and continue to talk about the topic. Since the market's mispricing is extremely common, it means that arbitrage can't eliminate wrong pricing, so the question that should be studied is why arbitrage can't eliminate wrong pricing, instead of turning a blind eye to wrong pricing.
When the direction is right, it will produce valuable new discoveries. Behavioral finance reveals the general irrational behavior and common mispricing, which gave birth to the theory of limited arbitrage. The limited arbitrage theory points out that because of the constraints in the market, arbitrage behavior is limited, so all wrong pricing cannot be eliminated.
This is not very simple and easy to understand. Of course, the limited arbitrage theory has thoroughly studied various market conditions, their respective constraints and their restrictions on arbitrage. We are not going to talk about it. The content of this section is to use the psychological bias of others. In fact, the direct inference is very simple, that is, arbitrage.
But we talk so much, we want to tell everyone that arbitrage is constrained. Unreasonable arbitrage can bring great risks. The simplest arbitrage is cross-market arbitrage. Just like the picture on the left, buy ice cream at market price 1 for 1 dollar, sell at market price 2 for 5 dollars, and earn 4 dollars for arbitrage.
Cross-market arbitrage is also known as moving bricks in the currency circle. Many people have done it. The first assistant, Mr. Li Ming, used cross-market arbitrage in 2014 and earned a lot of bitcoin. I arbitrage between EOS's ICO contract and the secondary market in 2017, and I also made a lot of money.
However, everyone should note that the cryptocurrency market is very friendly to arbitrage. Even for individual users, it can access the API interface of the exchange, and a large number of market makers can trade at zero. And with the development of the bear market, a large number of exchanges are committed to providing a variety of investment tools such as contract trading.
It can be said that the arbitrage constraint of the cryptocurrency market is rapidly decreasing. So is the cryptocurrency market a paradise for arbitrageurs? The answer is that some people are paradise, while others are restricted areas.
Since the birth of the cryptocurrency, this market has been globalized, and the market is flat. Although there are tens of thousands of independent exchanges, these exchanges are now connected by countless automatic trading robots. It can be considered that all players are playing in the same market. There is a strong winner-take-all effect.
Any team in the world, as long as he finds the wrong pricing and obtains the available arbitrage, it is possible to harvest investors from all over the world. In such a unified big market, there is fierce competition between arbitrage strategies. One situation is that multiple strategies compete for the same arbitrage space, and there is a strategy of PK between strategies, using strategies to harvest other strategies.
Therefore, the field of arbitrage is developing rapidly and quickly, and because it is a game, there is no winner forever. Participants are constantly adjusting their strategies. So for individual investors, my advice is to stay away from short-term arbitrage, because the water in this area is too deep and deeper, and individuals can't afford it.
You may find an arbitrage opportunity. At this time, why do you think that many professional teams have not discovered and used this opportunity? What unique advantages do you have to take advantage of this opportunity? In fact, it is very likely that you are not aware of the risks and costs behind the opportunity.
And even if you are lucky, you have a chance to make some money, but there is no way to build a moat, the road will only get narrower and narrower. Can you give up short-term arbitrage, can long-term arbitrage be done? For example, EOS and wave fields are smart contract public chains, which can be considered as similar assets.
Some investors analyzed the developer's ecology, community activity, Dapp water and other fundamentals, and concluded that the market value of EOS should be several times the wave field. Now the market value ratio of the two currencies is unreasonable, which is caused by group bias. Wrong pricing, so there are arbitrage opportunities. How to set it up?
Selling the wave field and doing more EOS at the same time, the EOS will increase the market value of the wave field. This kind of operation is theoretically plausible, but it is actually very dangerous, and it is easy to lose money. The finiteness and asymmetry of the cause of arbitrage.
There are many constraints on investor arbitrage. For example, short selling assets is costly, interest is paid, and the funds available to investors are not unlimited. Maybe your judgment is correct, the wavefield bubble will eventually burst, but the time of the break is unpredictable.
Before that, the market value of the wave field is likely to surpass EOS, even several times that of EOS. Such situations are common in the stock market and the cryptocurrency market. You can complain that the market is wrong, but it will still go out of business.
Even we often hear that the contract price of an exchange has a needle shape, accurately bursting out and then returning quickly. This is possible because all contracts are recorded on the exchange and a small number of market participants are able to master and utilize this information.
In general, arbitrage has high requirements for trading strategies, financial strength and market information. In these respects, individual investors have obvious disadvantages compared with institutional investment.
However, I am not totally opposed to arbitrage. The transaction timing in Lesson 4 is to establish a long position in a bear market with a depressed market sentiment, and to sell in a bull market with high market sentiment. From a broad definition, this is also an arbitrage.
However, the carrier it uses is mainstream, low-cost, and the potential loss is controllable, suitable for individual investors.