Evaluating the Group Thinking Mentality of Bitcoin (BTC) – Eric Brouwer
Herd mentality drives every bubble. You will find it in the bubbles of the past, present, and future. The psychology of the crowd can make one invest in products that with hindsight one should have steered clear from. Understanding how crowds tends to influence our behaviour can make one a more informed and wiser investor. Bitcoin serves as an excellent case study to illustrate crowd thinking mentality and how you can best avoid falling prone to it.
This article does not constitute legal or any other professional advice and is not intended to be relied upon as such.
Overcoming the herd
You may or may not realise that you have succumbed to group thinking. You may after all not even understand that there are symptoms of group thinking or you may not even care. But you should. In almost every bubble that we have encountered since time immemorial, those that partook in the bubble almost always succumbed to group thinking. They may not have understood that at the time, but with hindsight the symptoms of group thinking were evident. If only they knew and understood the effects of group thinking would they may have had a chance of avoiding the trap of investing in a bubble ripe for popping.
From the south sea company, tronics, dot com, and sub-prime bubbles, to bitcoin, group thinking has reared its head. Understanding when it is occurring or when it has occurred may thus put you in an advantageous position. To achieve that end, in this article, I will describe the most common symptoms of group thinking. And to labour and illustrate the point, I will analyse those symptoms against the bitcoin community. I do so because not only do I have an interest in bitcoin but also because I think the bitcoin community shows evident signs of group thinking. What follows then is a case scenario of bitcoin and its group thinking ways that will serve as an educational learning exercise with the aim of learning when group thinking may be taking place. Equipped with this knowledge, I hope that you will be able to make more informative and critical decisions.
Herd mentality and bubbles
Following the herd in investment can be a great boon when it leads to profitable investments but it may also lead to bad decision making. Take the South Sea Company and Tronics bubble as prime examples. Investors in those instances merely followed one another by piling in to companies that had no prospect of income or profit. People bought these companies because they believed, just like everyone else, that the value of the stock would continue to climb higher. By following the herd they exposed themselves to a tremendous rise in the price of these stocks only to be met by a horrendous sell off as investors flocked for the exit. Going with the herd in the end only led most investors to lose their shirts. The recent 2017 ICO bubble also remarkably highlights the instance of herd mentality as investors bought everything that had anything to do with blockchain and cryptocurrency. But we all know that that herd fell off a cliff.
People have a tendency to follow the crowd. For after all, we have a tendency to feel safe in numbers. We enjoy the comfort of being “in” the group in contrast to being “outside” the group. Those inside the group feel a sense of connection and belonging and they try to preserve the group against any outside influence or threat to the status quo. Take for example the 2008 financial crisis. Those who believed that the housing market could continue to go up forever, and that such an investment was bullet proof, ridiculed others who pointed out the flaws in such a belief system. In hindsight, such a herd mentality obviously has dangerous side effects that biases the group’s thinking.
Knowing when group thinking may be taking over then may have investment advantageous to understand when group thinking has taken over. Equipped with this knowledge investors may be able to get out of detrimental positions before the crowd gets wiped out, just like in every other bubble formed to date. What follows next is an examination of the key symptoms of group thinking and how they apply to bitcoin.
Eight symptoms of group thinking
Irvin Janis and Leon Man in their book “Decision Making: A Psychological Analysis of Conflict, Choice and Commitment” identified eight symptoms of group thinking as follows:
1. An illusion of invulnerability
2. Collective rationalization
3. Belief in inherent morality
4. Excessive stereotyping
5. Direct pressure on dissenters
6. Self-censorship
7. Illusion of unanimity
8. Mind guards are appointed
Understanding how each symptom operates will strengthen your understanding of group thinking and will allow you to minimise the effects they may have on your decision making. To appreciate their significant, I will now analyse each one in turn as it applies to bitcoin. My thoughts on each symptom derive primarily from my own observations and anecdotal evidence. Take from this what you will.
1. An illusion of invulnerability
The first group thinking symptom means that members ignore danger, take extreme risks, and are overly optimistic.
Many members of the bitcoin community display this symptom, especially in relation to taking extreme risks and their optimistic forecasts of bitcoin’s potential price appreciation. Although risk may be a subjective concept, many in the bitcoin community feel as if putting it all in bitcoin is a safe play. They reason that the risk of not investing in bitcoin far outweighs the risks of sitting on the side lines. I have even seen people investing their entire life savings, selling their homes, or even taking on debt to purchase more bitcoin. This seems crazy to me and you can find many stories of people doing this by conducting a quick google search.
Now of course this represents anecdotal evidence that does not represent the whole bitcoin community but it does give you a flavour of the mentality that people have towards investing in bitcoin. Such thinking is again not limited to bitcoin. Remember taking extreme risks is a symptom of group thinking and one that we have continuously seen throughout the history of investing, as per the 2008 financial crisis for instance.
We also witness extreme optimism in relation to bitcoin. The favoured meme as of writing is: “bitcoin fixes this” which symbolises bitcoin as a panacea for all faults in society. The monetary system, debt, excessive spending, drink and substance abuse, all curable by bitcoin. There is simply almost nothing that bitcoin cannot fix, except maybe a hangover as one twitter writer adeptly pointed out. The point is that many in the bitcoin community truly believe that bitcoin has properties that can solve many of our problems to date, even if such belief is far removed from what is possible in reality.
By far the best example of extreme optimism is the outlandish market predictions for bitcoin’s price. People in this community have expectations that due to bitcoin’s limited supply bitcoin will continue to increase in value forever. It is common to find price predictions in the millions for a price of a single bitcoin. The crazy part is that people actually believe in these figures. These are probably the same people that invest everything they have in bitcoin or put a mortgage on the house to facilitate more speculation on this digital asset. Such narratives contribute to the illusion of invulnerability: that bitcoin is an unstoppable force that will only appreciate in price. But remember this: No one, I mean no one, not even the best investors of our time can predict the future! It is far too unpredictable and so buying into the narrative that bitcoin can only moon emphasises this illusion of invulnerability.
2. Collective rationalization
Collective rationalization means that members in the bitcoin group discredit and explain away warnings contrary to group thinking.
The most obvious form of this symptom is displayed on crypto twitter. If you happen to say anything negative about bitcoin or point out its flaws or possibility to go to zero, some people will instantly say that you do not understand bitcoin or in the alternative they will simply revert to attacking your character rather than your argument. Much of the time members will use “economics” to explain away anything negative about bitcoin.
For example, arguments such as bitcoin has no intrinsic value or that bitcoin has speculative properties often get dismissed with members making a great effort, often coming up with new valuation metrics, to explain away such criticisms or discredit such arguments. Now there is nothing wrong with opposing arguments, but constantly explaining away or discrediting anyone that opposes bitcoin on the basis of illogical arguments may be a symptom of collective rationalization.
3. Belief in inherent morality
When members hold a belief in inherent morality it means that they believe their decisions are morally correct whilst ignoring the consequences of their decisions.
We can find this symptom with members of bitcoin, again through a simple meme: Bitcoin is good, fiat currency is evil. Members believe that the decision to invest in bitcoin is inherently good because it opts them out of the traditional financial system in the belief that using the traditional fiat based monetary system is the ill of all our evils. They consistently opine that inflation, through the printing press, has robbed us of the fruits of our labour. They believe that using and investing in bitcoin is morally right while keeping with the fiat currency status quo is morally wrong. They assert that investing in bitcoin preserves wealth while fiat currency only destroys it.
Hence, from their perspective, the former is morally right while the latter is morally wrong. They make this proclamation without realising that “opting out” may in fact turn out to be morally wrong if in the end bitcoin actually makes them worse off. It also reflects a value judgment on their part that adopting bitcoin is suitable and the right thing for everyone despite the fact that bitcoin may not have any net benefit for that person taking into account their socio-economic conditions. What may be morally right for one group is not necessarily morally right for another.
4. Excessive stereotyping
The fourth symptom of group thinking arises when members construct negative stereotypes of rivals outside the group.
We see this most readily when members posit that anything other than bitcoin including fiat currencies are equivalent to “shitcoins”. “Any altcoin is garbage”. “Any fiat currency is trash”. “Those who invest in anything other than BTC are idiots”. You get the point. Some members of the bitcoin community routinely project negative stereotypes against others outside the group. Indeed, we evidently see this with BTC members projecting negative stereotypes of the BCH and BSV communities.
5. Direct pressure on dissenters
This symptom takes effect when members pressure anyone in the group to change their opinion who expresses arguments against the group’s mentality, viewing such people as disloyal.
We see this time and time again with bitcoin members pressuring investors who invest in sub-sets of bitcoin. Members in the BTC group that voice an opinion in favour of BCH or BSV may find themselves under pressure to change their views to align with the status quo. It seems as if from the perspective of members of the bitcoin core community that one can only be affiliated with that community. Aligning oneself with other bitcoin communities may open oneself to attack and ridicule. You either pledge allegiance to the bitcoin core group or you are ostracized and labelled as disloyal. Hence the coinage of the term “bitcoin maximalist”: an individual that preserves the thinking of the group and targets those that are disloyal to the group’s way of thinking.
6. Self-censorship
Self-censorship means that members in the group preserve their dissenting views and counterarguments.
As a result of pressure from other group members and the risk of being labelled as a disloyal dissenter, those in the group may feel that they must withhold their alternative views. They may feel that if they express anything not aligned with the group’s way of thinking that they will immediately be kicked out of the bitcoin community. They may have worked hard to acquire status and a following in the community and as such they consciously censor their opinions to maintain their position and appease followers. They may not want to risk making a statement that jeopardises the goodwill they have built up with the community. This then has the effect of self-censorship and constraining the views of the group to opinions that the group approves of, all of which reinforces the status and group thinking mentality of the group.
7. Illusion of unanimity
With this symptom, members perceive falsely that everyone agrees with the group’s decision and they view silence as consent to the group’s way of being.
We may witness this symptom in the bitcoin community when for instance a prominent leader in the bitcoin group makes a certain statement or decision. The most obvious illustration of this occurs when a highly regarded figure makes a bullish sentiment on bitcoin’s price. Those in the group will often perceive this to be gospel and that everyone in the community agrees with that price projection as a default. What they may not realise however is that not everyone agrees with the statement or decision. They may be blind to other people’s disagreement. Their inability to internalise disagreement thus creates an illusion of group unanimity.
8. Mind guards are appointed
In a group that has symptoms of group thinking, some members of the group will take it upon themselves to become mind guards in an effort to preserve the thinking of the group and to protect the group from any adverse information that may change the way the group thinks and behaves.
In the world of bitcoin, many mind guards exist. If you have been observing or participating in this space for any length of time you will know who I am talking about. If you have not, no worries, they are easy to spot. You will find them on Twitter where the bulk of bitcoin discourse occurs. They may or may not have a blue check mark on twitter but they most certainly will have a loyal and active following. If you monitor their activity you will find that their opinions have the objective of preserving the thinking of the group and deflecting any negativity about the way in which the group thinks. As mind guards, they not only preserve the group but they often are responsible for controlling the narrative of the group. They take on a dual role as thought leaders of ideas for the group and as protector from outside attack. In essence, they are the glue that keeps the group together.
Think for yourself
Understanding the symptoms of group thinking may have opened your mind to the possibility that bitcoin exhibits many of the symptoms of group thinking. This may persuade you to think more objectively about bitcoin or you may dismiss it as nonsense. The choice is yours. But the purpose of this article is not primarily to critique bitcoin but to understand that group thinking does exist and to recognise the symptoms of it. Like I said earlier, group thinking is not limited to bitcoin. You will find it in many instances of the investment community and particularly when bubbles in the market are brewing.
So equipped with your new found knowledge what should you do with it? Well, the most obvious answer is to be more objective and critical in the way you view your investments. Conduct due diligence without bias and recognise when your own biases may be clouding your own judgment. Be sceptical about what others have to say about the investment your considering, paying attention to both positive and the negative views. Think about whether those who are selling the investment portray any symptoms of group thinking. If they are, think very carefully about whether following the group is a good idea. It may after all be more beneficial to be a group contrarian rather than a follower. Because remember, all bubbles exhibited some form of group thinking that sucked in many investors into the group only to be left out to dry once the bubble finally pricked. So try to draw your own conclusions and keep any group thinking in check.
Lastly, if you deeply believe in an investment product and are emotionally invested, take the time to step back and critique yourself. Try to look at your behaviour objectively and point out any instances of group thinking you may have. You may find that in fact you have succumbed to group thinking yourself. In that case, it may be wise to reevaluate your position in that investment. It may not be a fun exercise and you may not like the results that come, but it may save you a lot of emotional stress and money. That’s my two cents of wisdom anyways. Take it or leave it!
You can read more of my articles on my website: www.ericbrouwerlegal.com
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Published at Sun, 02 Feb 2020 11:25:17 +0000
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