Science Behind Crypto Misconceptions: The Anchoring Effect
Main Takeaways
Science shows that the way people form their opinions and make decisions is far from being perfectly rational. How we think just about anything â including crypto â is heavily influenced by unconscious biases and systematic fallacies to which every human is prone to some extent. Â
The anchoring effect is a human tendency to be overly reliant on the first piece of information they receive regarding a topic. Beliefs formed this way can also become resistant to change â even when evidence to the contrary is presented.
Anchoring can be responsible for some of the common misconceptions, both crypto-specific and unrelated, that persist in our society.
Have you ever used the metaphor âgoldfish memoryâ to describe someone who forgets things quickly? Or, perhaps, you wished that you could find a way to use more than ten percent of your brain capacity and thus achieve extraordinary mental powers? This is likely because in the past you may have been influenced by specific âfactsâ about goldfish and the human brain, which had anchored the way you think about these things. Spoiler alert â these âfactsâ are actually wrong!
The way people form opinions and make decisions is far from being perfectly rational. Yet, we don't often stop to rethink or see the world differently. It's natural for our brains to simplify things so we can react quickly, but this can also let cognitive biases â unconscious bits of irrational thinking â sneak in. These biases can influence our perception and may ultimately lead to bad decisions, affecting everything from getting medical help on time to making investment choices.Â
In our new series, Science Behind Crypto Misconceptions, we'll look at common false beliefs caused by these cognitive biases and how they lead to misunderstandings about crypto.Â
The Anchoring Effect
Goldfish are capable of remembering things for months. If you were thrown off by this statement because you are used to believing that goldfish canât hold a memory for more than a few seconds, it is likely due to the anchoring effect.
It is normal for humans to rely on and trust the first piece of information (also known as an anchor) about an object or phenomenon they encounter, basing subsequent judgements and decisions on it. This effect can be especially pronounced when the anchor contains an exact number â in this case, a remarkable factoid about three or five seconds of memory length, depending on the version of the popular myth youâve encountered.Â
Since most people donât spend a lot of time thinking about goldfish and usually donât know much about them beyond this memorable âfact,â the anchor sticks, becoming the foundation for individualsâ thinking on the topic long after theyâve forgotten where theyâd heard the anchoring piece of information.
Initially an evolutionary mechanism that optimized human thinking and allowed people to make quick and efficient decisions, cognitive biases like anchoring can be detrimental as our lives have become more complex than in hunter-gatherer times. We can make suboptimal judgments based on the anchor, even when the initial piece of information has already been proven false â and it is especially true when it comes to novel and dynamic topics like Web3 and crypto.Â
Everyday Misconceptions: Goldfish and Brains
The idea that goldfish only possess a 3-second memory is so widely and universally accepted that the term âgoldfishâ is frequently used to poke fun at someoneâs forgetfulness. This myth has persisted across societies and cultures, and it is often the first and only thing that people know about goldfish.Â
However, scientists have known for decades that the species can remember things for weeks and months â itâs just their findings never gained traction comparable to the popular misconception theyâve debunked.Â
The same could be said for the widespread belief that humans only use 10% of their brain capacity. The latest neuroscientific research suggests that not only do we use our entire brain daily, our brain is also active at all times. But again, a number commonly attached to the attractive notion that we only use a small fraction of our cognitive potential has likely anchored many peopleâs thinking about the limits of the human brain when they first encountered it.
If we can be so susceptible to the anchoring effect when it comes to these common misconceptions, it is no wonder that many people hold inaccurate beliefs about cryptocurrencies â a domain that until recently has been relatively niche and seen as obscure by most people outside of the digital-asset bubble. As crypto inches closer to mainstream adoption, many misconceptions that took hold during its early years can get in the way of progress.
Crypto âAnchor:â Is BTC too Volatile, After All?
The three-second memory is often one of the few things, if not the only one, that people know about goldfish. For those who only know one or two things about bitcoin, what would those be? Oftentimes, it is beliefs based on âanchoringâ facts theyâve encountered.Â
"Bitcoin is too volatile to be a reliable investment" is a common claim that people not very familiar with the crypto space often make. It is very easy to see why they think so: during the first decade and a half in existence, the original cryptocurrency has seen epic ups and downs, and the volatility of BTCâs price in the early years of crypto dwarfed that of more traditional investments. A conspicuous trait for a financial asset, the notion of bitcoinâs volatility has likely anchored many peopleâ perception of the original cryptocurrency at the time when they first heard about it.
Times have changed. Today experts debate whether bitcoin can be considered digital gold, discussing its demonstrated ability to preserve value over time and hedge against inflation and devaluation of national currencies. As crypto matures and gains mainstream acceptance, some of the worldâs top investment firms race to gain exposure to BTC, providing an influx of capital that contributes to further stabilizing the asset. Clearly, bitcoinâs volatility has declined and is expected to continue doing so.
A recent study on the subject found that in late 2023, Bitcoin was less volatile than 92 S&P 500 stocks. In other words, if bitcoin is indeed âtoo volatileâ to be a reliable investment, close to 20% of S&P 500 stocks would also be below this imaginary standard.Â
Final thoughts
Biases like the anchoring effect can play a big role in shaping our perceptions and beliefs, often leading to misconceptions that can be hard to shake, even in the face of contrary evidence. This applies to everyday myths like goldfish memory or brain usage; it also influences how people view complex topics like cryptocurrencies. By understanding and acknowledging these biases, we can make more informed decisions and foster a more accurate understanding of the world around us.
So, the next time you hear someone dismissing digital assets as having no intrinsic value or labeling bitcoin as too volatile, remember that these views might just be anchored in outdated or incomplete information. Keeping an open mind and questioning our initial assumptions can help us navigate the dynamic landscape of crypto with greater clarity. After all, in the world of digital assets, it's always worth diving deeper than the surface to uncover the true value beneath.
Thereâs a wealth of information on all kinds of crypto topics to be found on Binance Academy â our open-access learning hub providing free blockchain education. Plus, stay tuned for more entries in our Science Behind Crypto Misconceptions series!