8 Cognitive Biases to Watch For in Your Crypto and Web3 Adventures

How to identify and mitigate against debilitating cognitive biases.

While we — human beings — like to think of ourselves as rational creatures, the truth is we are anything but.

We are prone to over 100 cognitive biases that can shape our perceptions, beliefs, and decisions.

As one might imagine, the weird and wonderful world of crypto and web3 is not immune from said biases.

Becoming aware of these biases can be a powerful step towards making better decisions, and investing your time, money, and energy more wisely.

I’ve unpacked eight cognitive biases and mitigants that web3 builders, investors, and users, could benefit from.

If you’ve got some alternative mitigants to address these biases, I’d love to hear from you in the comments.

1. Echo chamber effect

The echo chamber effect occurs online when a harmonious group of people amalgamate and develop tunnel vision. Participants in online discussions may find their opinions constantly echoed back to them, which reinforces their individual belief systems due to the declining exposure to others opinions.

If you’re constantly surrounded by crypto-bulls and web3-maximalists on crypto Twitter, in Discord servers, or on Telegram, then it can be easy to develop said tunnel vision, have your pre-existing beliefs amplified, and fall into a category of folks who find it unfashionable to bet against crypto.

But any worldview that fails to account for what-could-go-wrongs is susceptible to being blindsided and paying the price in the long term.

See also: Bandwagon effect, Availability cascade, Shared information bias

How to mitigate against it: Follow people and actively make an effort to consume content that is skeptical of crypto and web3. You don’t have to agree, but hearing alternative views might help to sharpen your own. Here are 8 crypto skeptics you should follow.

2. Backfire effect

The reaction to disconfirming evidence by strengthening one’s previous beliefs.

Building on the echo chamber effect, we need to be conscious of the fact that when we truly believe in and are bullish about something, we might discount opposing views offhand without really listening to or considering their arguments.

When we do this, we risk no longer seeking truth, but simply a sense of righteousness.

How to mitigate against it: The development of self-awareness is required to catch any such discounting in the moment, and instead, ask “under what circumstance might the alternative argument have merit?”, or, “how might I be wrong?”.

3. Halo effect

The tendency for a person’s positive or negative traits to “spill over” from one personality area to another in others’ perceptions of them

This is true of people as it is of brands. For example, one NFT collection might go to the moon, so we want to get in early on all NFT collections, but most are unlikely to get to low-earth orbit let alone the moon.

Similarly, the same can be said for copycat NFT collections, protocols spun out of existing successes, or folks who once did something great in web2 and are now building something in web3. Sure, these can all be positive signals, but at the same time, we should be wary of the halo effect.

How to mitigate against it: When evaluating opportunities, be they businesses, people, or products, try not to let preconceived notions about quality or lack thereof affect your ability to make impartial, objective judgments based on the data at hand. For example, just because X worked or Y didn’t work in the past, it doesn’t necessarily mean the same will hold true in the future

Define key metrics of success or performance that matter and evaluate things based on their respective merits — a healthy dose of professional judgment paired with hard data usually works best.

4. IKEA effect

The tendency for people to place a disproportionately high value on objects that they partially assembled themselves, such as furniture from IKEA, regardless of the quality of the end result.

This one is especially true for builders and foundation community members. It’s normal to attribute more value to things that we are involved in. But that doesn’t necessarily mean that those things actually have more value.

In fact, a 2011 study found that subjects were willing to pay 63% more for furniture they assembled themselves than pre-assembled items.

These can leave us hyper-defensive and failing to see the flaws in our projects.

See Also: Not-Invented Here Bias

How to mitigate against it: Actively seek out critical feedback from smart and relevant folks not directly involved with your project. Ultimately, the market will determine whether your project has the value you think it has.

As the grandfather of the lean startup movement, Steve Blank, put it, “no business plan ever survived first contact with a customer.”

5. Law of the instrument bias

An over-reliance on a familiar tool or methods, ignoring or undervaluing alternative approaches. “If all you have is a hammer, everything looks like a nail.”

“We need an NFT for this!” is quickly replacing “we need an app for this!”.

While the advent of NFTs presents us with new and novel ways to raise capital and engage communities of people, they aren’t always necessary.

When we become NFT-maximalists or social-token maximalists, or what have you, we might build non-solutions to non-problems.

For example, NFT fan clubs are interesting. Buy your favorite bands’s NFT, get access to pre-release tickets, exclusive merch, and more. But fan clubs doing exactly that have been around since before the internet.

See also: Mere Exposure Effect, Pro-Innovation Bias

How to mitigate against it: NFTs might make the above-mentioned fan club process better and improve engagement and ownership, yes, but when trumpeting the merits of a solution, consider how the problem was solved in the past and whether your solution really is 10x better (because a little bit better usually isn’t enough to interest people).

6. Normalcy bias

The refusal to plan for, or react to, a disaster that has never happened before.

The number of people jumping into crypto has quadrupled since the bubble burst in early 2018 (see below), and as such three-quarters of wallet holders have seen crypto prices for the most part trend upwards for four years.

Not having lived through any crypto winters can leave one susceptible to becoming over-optimistic about the future, and failing to account for downside risks and hedge against them accordingly.

See also: Risk Compensation Bias, Optimism Bias

How to mitigate against it: Consider diversifying your investments across different types of both crypto and non-crypto assets such as equities, bonds, property, and off-chain startup investments.

Also, consider products such as Index Coop’s Inverse MATIC token which is effectively a bet against crypto.

Source: Statista

7. Optimism bias

The tendency to be over-optimistic, overestimating favorable and pleasing outcomes.

Building upon the normalcy bias, we tend to look at the future through rose-colored glasses and discount the inevitable challenges that will come our way.

This is why we can be crazy enthusiastic once we kickstart an entrepreneurial venture but lose that enthusiasm once a few sales calls go against us or we spend $5,000 on Facebook Ads that generated zero business.

The same holds true for starting diets or exercise routines, quitting drinking, or saving more of what we earn.

How to mitigate against it: When embarking on web3 projects as a builder or investor, test your assumptions by placing lots of small bets — this could be small investments of time, energy, and money, to gauge rewards and how tightly coupled your assumptions are with reality.

Doing so means you will chart your course with data and lived experience as opposed to the rose-colored glasses of the optimism bias.

8. Surrogation

Losing sight of the strategic construct that a measure is intended to represent, and subsequently acting as though the measure is the construct of interest.

Also known as confusing the means with an end in itself. The world of web3 gives us opportunities to re-design how we live, work, and play, but all organizations should serve some greater purpose than merely existing.

Building a DAO is cool, but what is the underlying mission of your DAO?

P2E games where people breed animals are cool and all, but what if we moved to a P2G model, where a percentage of those revenues went towards effective charities that actually saved lives?

Decentralization has merit in and of itself, but it should also be a means to raising capital, coordinating resources, and creating impact in the world, too.

How to mitigate against it: Take stock to consider whether the mission of the projects you’re involved in would speak to you in a web2 world, and if not, is there a possibility that you’re only interested because they’re decentralized and that the mission doesn’t stand on its own?

Join the discussion

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form


Leave your details below.

Thanks for your submission. We will be in touch shortly!
Oops! Something went wrong while submitting the form.