Overconfidence and Confirmation Bias

Market Meditations | October 12, 2020

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Today’s Meditations:

  1. Group Raising Funds to Sue Andre Cronje Over Emn Hack

  2. Grayscale’s Ethereum Trust Granted SEC Reporting Company Status

  3. Belgian Investors Lost $12m to Crypto and Forex Scams Last Year

  4. Renminbi Sinks after PBoC Responds to Biggest Rally in 15 Years

  5. Boris Johnson Unveils Three-Tier System to Combat Covid

  6. EU Targets Big Tech with ‘Hit List’ Facing Tougher Rules

  7. Overconfidence and Confirmation Bias

Crypto News

Oct 13. OWL: StealthPay app & StealthSwap protocol

Oct 14. Zilliqa (ZIL): Release of non-custodial staking

Oct 14. Degen.vc (DGVC): Airdrop (Stake Uniswap LP tokens in order to qualify)

Oct 17. Monero (XMR): CLSAG release

Global News

Oct 12. BoE’s Governor Bailey speech

Oct 13. GBP ILO Unemployment Rate, Germany Harmonized Index of Consumer Prices and USD Consumer Price Index 

Oct 14. ECB’s President Lagarde speech

  • Group Raising Funds to Sue Andre Cronje Over Emn Hack. A group of investors is crowdfunding a lawsuit against famous Yearn Finance (YFI) founder Andre Cronje regarding the unreleased and unfinished Eminence protocol and hack. In a medium article, the anonymous ‘EMN Investigation’ writes that ‘we are crowdfunding capital to finance a lawsuit against Andre Cronje, Kirby and Banteg over the EMN scandal on behalf of the victims. 100% of every donation will be used to finance the lawsuit.‘ The article promises to take a snapshot of the addresses that contributed to the pool of funds and reward supporters with an airdrop of 50% the supply of a fork of YFI, claiming they will ‘create a new decentralized finance ecosystem, but without the bad actors.’ Cronje apparently took a step back from social media after he received death threats following the EMN exploit, but tweeted he was still working hard despite all the news surrounding the incident. Read more.

  • Grayscale’s Ethereum Trust Granted SEC Reporting Company Status. In a press release today, Grayscale announced that the Grayscale Ethereum Trust is now a Securities and Exchange Commission (SEC) reporting company, a move that will increase the trust’s transparency and potentially liquidity. Grayscale Ethereum Trust is solely and passively invested in Ethereum, enabling investors to gain exposure to ETH in the form of a security while avoiding the challenges of buying, storing, and safekeeping ETH directly. It is the second digital currency investment vehicle to attain a status of an SEC reporting company, following Grayscale’s Bitcoin trust. The trust will regularly disclose how much money is flowing through its passive ETH investment vehicle, according to the SEC filings. Read more.

  • Belgian Investors Lost $12m to Crypto and Forex Scams Last Year. Belgium’s financial watchdog reported that scammers stole up to $12 million from investors and other market participants in the country using scammy advertisements. In a warning from the Financial Services and Markets Authority (FSMA), the watchdog said ‘fraudulent platforms, including those dealing with cryptocurrencies, scammed victims using fake advertisements on social media featuring pictures of celebrities, directing them to provide information to bad actors.’ Through different phishing scams, hackers attempt to take control of your computer remotely so that they are able to make certain payments. The FSMA has already blacklisted more than 140 crypto-related fraudulent websites and estimates that the amount is actually way higher due to the majority of incidents going unreported. Read more.

  • Renminbi Sinks after PBoC Responds to Biggest Rally in 15 Years. A historic rally in China’s renminbi halted on Monday after the country’s central bank cut the cost of betting against the currency in the wake of last week’s biggest daily gain in a decade and a half. The onshore-traded renminbi fell as much as 0.9% to Rmb6.754 against the dollar – its biggest drop since the market tumult of March – after the People’s Bank of China announced on Saturday that lenders would no longer be required to hold reserves when buying foreign currency forward contracts. The move from the PBoC suggests that while authorities will tolerate some strength as the renminbi’s global role grows, they remain uncomfortable with sharp rallies that could threaten China’s economic recovery – a particular risk if the US presidential election yields a win for challenger Joe Biden, whose rhetoric towards China has been far less strident than Donald Trump’s. Read more.

  • Boris Johnson Unveils Three-Tier System to Combat Covid. In the latest of a series of attempts to control Covid, Jonson announced new restrictions, with bars and pubs closing in the worst hit-parts of England from Wednesday. Johnson set out his plan for a three-tier system of Covid alert levels, set at medium, high and very high, to simplify the imposition of lockdown measures. The toughest measures are to be imposed in Liverpool, where the outbreak is spreading faster. Such an approach aims to contain the virus without having to implement a national lockdown as was the case before. Frankly, the economy could not handle another national lockdown so it is not really an option. As well as pubs and bars being forced to close, households will be banned from mixing indoors and in public gardens. Only time will tell if there will be further lockdowns imposed. Read more.

  • EU Targets Big Tech with ‘Hit List’ Facing Tougher Rules. EU regulators are drawing up a ‘hit list’ of up to 20 large internet companies, likely to include Silicon Valley giants such as Facebook and Apple, that will be subject to new and far more stringent rules aimed at curbing their market power. Under the plans, large platforms that find themselves on the list will have to comply with tougher regulation than smaller competitors, according to people familiar with the discussions, including new rules that will force them to share data with rivals and an obligation to be more transparent on how they gather information. The list will be compiled based on a number of criteria, including market share revenue and number of users, meaning the likes of Facebook and Google are likely to be included. Those deemed to be so powerful that rivals cannot trade without using their platforms could also be added. Read more.

Overconfidence and Confirmation Bias

Humans sometimes believe what they want to believe. When we would like something to be true, we often end up believing it to be true. We are often overconfident in our personal beliefs without being aware of it. Everybody is subject to certain systematic errors in thinking, and knowing that they exist is a necessary step in protecting yourself against them. Financial, political, scientific and other disciplines are full of literature that explain errors due to gradual accumulation of supportive evidence while ignoring facts that disprove or weaken the analysis.

Wikipedia defines confirmation bias as ‘the tendency to interpret or favor information in a way that confirms or supports one’s prior beliefs or values’. Once we have formed a view on something, we use that information while ignoring or rejecting information that disproves it. By doing this, we lose our ability to look at the world objectively and are prone to mistakes in thinking and ultimately end up making avoidable mistakes. 

Improve your thinking

Markets are an environment where mistakes caused by confirmation bias are ubiquitous. That’s why only following traders and investors that confirm your beliefs is generally a bad idea. Any market participant can find both bullish and bearish arguments at any given moment to support their opinion. Instead, actively seek out people you disagree with but respect their analysis. Reminding yourself to look at both sides of the argument helps you look at things more objectively and make better informed decisions as a result.

Of course, this doesn’t just apply to markets alone. Only consuming things you already agree with won’t make you any smarter. Seek out people you respect and have different opinions on a certain topic. Read books that you do not necessarily agree with. Only when you understand both sides of the argument are you able to make an objective decision and become a better thinker in the process.

Disclaimer: The content in this newsletter is for informational purposes only. Nothing in this email is intended to serve as financial advice. I am not a financial advisor. Every investment and trading move involves risk. Do your own research when making a decision.