The Psychology of Bitcoin Misjudgment – Info News

1. Reward and Punishment Superresponse Tendency

The idea here is that man is driven by incentives, and that we can overreact to experiencing rewards or punishment, which can lead to the infamous ‘man-with-a-hammer syndrome’ (to a man with a hammer, every problem looks like a nail (resisting the urge for a John Henry pun here)). Such incentives driven bias are always a good reason to question professional advise when the advisor stands to gain — the proverbial asking a barber whether you need a haircut.

In the Bitcoin realm, I’ve seen first hand people who have reaped very real and significant trading profits adopt the man-with-a-hammer mentality, and turn to an always buy never sell mentality. Evaluating the most high-profile of these advocates’ buy recommendations should always be tempered with the realization that they do benefit from wider adoption, they’re ‘talking their book’, which assuming a wide enough audience can actually turn into a very real investing edge (just look at how investors pile onto each announced Berkshire transaction for this behavior’s potential taken to an extreme).

Munger gives some very rich examples in this section, and I’ll mention a few. The story is told of Westinghouse in the 90’s throwing accounting standards to the wind as they ventured far outside of their circle of competence for construction lending (and as a result getting bought out by the industrial conglomerate Siemens in the process) — the incentives of misrepresenting credit risk costing them billions. Those looking to place sizable bets on speculative cryptocurrencies would be wise to take an honest assessment of their own circle of competence. Early success in a position can easily fool one to a false belief that the nature of a risk is understood.

Munger also offers a hero of the incentive game, John Henry Patterson, the founder of the National Cash Register Company. Patterson was an evangelist and salesman and hugely influential to the retail industry adopting this novel form of collecting payments. The heroism comes from the technological elimination of several perverse incentives that can lead to dishonest behavior at large scale. Bitcoin has it’s own hero, the so far anonymous ‘Satoshi Nakamoto’ who, assuming he is only one person, was responsible for the original architecture and rollout of the bitcoin protocol (and remains the largest currency holder by far). It is certainly possible that bitcoin will one day have as transformative an impact on transactions (financial or otherwise) as the cash register, and even if not bitcoin itself certainly some version of blockchain enabled cryptocurrency technology will.

A final example from this section of the checklist I find both relevant and kind of humorous. Munger sites that a monkey can be trained to seek and work for an intrinsically worthless token if the token is routinely exchangeable for a banana — thus demonstrating that even in primitive brains the liquidity of an arbitrary instrument allows a value be derived and a currency to be accepted. The implications for bitcoin are obvious.