Recency Bias - The Daily Gwei #272
Avoiding the pitfalls of short-term thinking.
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As humans we are effected by many different cognitive biases (well over 100) and these biases play a large role in our every day lives. In today’s piece, I wanted to shine a light on one particular bias that I see play out in the crypto ecosystem all of the time and that is ‘recency bias’.
Wikipedia defines ‘recency bias’ as follows:
Recency bias is a cognitive bias that favors recent events over historic ones. A memory bias, recency bias gives "greater importance to the most recent event", such as the final lawyer's closing argument a jury hears before being dismissed to deliberate.
It’s always funny to me when the crypto markets hit the sort of turbulence that we’ve seen over the last few weeks - the sentiment literally flip flops based on what the market is currently doing which is the perfect example of recency bias. For example, If ETH has been outperforming BTC for a few weeks, that must mean the flippening is around the corner, right? What about El Salvador making BTC legal tender - that must mean that everyone in El Salvador is going to be using BTC as money! And of course, the most obvious recency bias in crypto is when people will give legitimacy to a project just because it’s had some short-term price appreciation.
Though the reality is that this entire industry has always been a marathon - not a sprint. The coveted “mass adoption” is not going to happen overnight and we’ve already seen plenty of boom and bust cycles since Bitcoin first hit the scene in 2009 and we’ll see plenty more in the future. But as humans we are very prone to recency bias because our monkey brains are just wired that way - breaking away from this bias can prove very difficult (especially for people who are newer to this ecosystem). In saying that, I believe that the more time you spend in the crypto industry, the better you become at being able to take the long-term view. Think about it - if you’re actually “in it for the tech” and believe this industry will fundamentally transform society then you’ll always have something to look forward to and be excited about regardless of short-term market conditions.
Alright, let’s look at the positive fundamental value drivers that have occurred in the past (or will occur in the future) that people who bottleneck themselves into short-term thinking will miss. Well, to start, we had the Beacon Chain go live on December 1st of 2020 which represented around 6 years worth of work to get Ethereum’s proof of stake off the ground. During mid-late 2020 and early 2021 we had the legitimization of DeFi and NFTs - they went from being viewed as toys to being considered industry-disrupting technologies. Over the last few months we’ve also had various layer 2 and scaling technologies go live with more coming in the near future. And finally there’s 2 game-changing upgrades coming up to Ethereum - the activation of EIP-1559 on mainnet (late July/early August) and the eth1 <> eth2 merger (early 2022).
I know that at the moment many of you are probably frustrated by the market movements we’ve been experiencing over the last month or so and honestly I don’t blame you (sideways markets are so boring). But I think it’s always important to contextualize these things and focus on what things are still exciting about Ethereum and there’s a whole lot of that!
Have a great weekend everyone,
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All information presented above is for educational purposes only and should not be taken as investment advice.