Unit 2 · Level 1 · Cognitive biases
Recency & anchoring
Two biases tag-team your sense of price. Recency bias projects the recent past forward: three green years start to feel like a law of nature. Anchoring locks your judgment to a reference number, usually the first one you saw: your entry, or the all-time high. Neither number knows anything about tomorrow.
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What you get asked
'It hit €300 last year, so at €100 it's obviously cheap.' The flaw?
Plenty of assets never see their old high again. The Nasdaq needed 15 years, and many 2021 coins never will. 'Cheaper than before' is not 'cheap'.
Match the bias to its voice
Same machinery, different reference points. Any time a specific old number drives today's decision, an anchor is steering.
After three green years in a row, expecting a fourth 'because that's how it's been' is ___ bias.
Recency bias is why crowds are most bullish at tops and most bearish at bottoms: the recent past simply feels like the future.
A coin fell 90% from its 2021 high. Buyers anchored to the ATH call it cheap. What can it still do?
From −90% to −99% is another −90% loss for the new buyer. Plenty of 2021 tokens did exactly this. 'Down a lot' is a history, not a floor.
The anchor-proof way to judge a price:
The market prices the future; anchors live in the past. Would you buy it today, at this price, knowing what you know now? That question drops every anchor. 🐜
The rest of this unit
Loss aversion, echo chambers, anchors, hubris: the bugs in everyone's mental firmware.