The Origins of Economic Decision Biases and How They May Relate to The 2017 Bitcoin Bubble

Research in behavioral economics over the past few decades has shown that people’s decisions often deviate from those of “homo-economicus,” the …

Research in behavioral economics over the past few decades has shown that people’s decisions often deviate from those of “homo-economicus,” the selfish rational agent who is the hero of most economic theory textbooks. These deviations (also known as “decision biases”) often lead to suboptimal outcomes in the individual and the societal levels and have become the target of various policy interventions.

For instance, in 2017, Bitcoin reached $10,000. While the figure $10,000, by itself, doesn’t deliver much beyond the fundamental price information, this number had significant psychological implications. Because humans generally think in round numbers, hitting the $10,000 threshold has become an important event that made it to the front page of the evening news.

Behavioral economists have characterized many other systematic decision biases that unlikely reflect arbitrary mistakes. But what is causing them?

The 2017 Road to 10K. Source: Visualcapitalist

Contemporary humans face decision problems that are quite different from those that our ancestors had encountered. Deciding whether to go hunting or foraging for grains is different from choosing between 30 types of barbecue sauce on the supermarket shelf; forecasting tomorrow’s rainfall based on today’s weather is not the same as predicting tomorrow’s Bitcoin prices based on today’s market. As our brains have evolved in environments that do not resemble modern markets, we might rely on assumptions that are no longer optimal when making economic decisions.

In contrast to financial decision-making, humans seem to make reliable judgments and decisions in the perceptual domain. Although sensory illusions are pervasive in carefully controlled experiments under unnatural settings, people are remarkably good at making sense of perceptual information as they navigate the chaotic world outside the laboratory. Past documentation of a visual illusion in the field, a photo of a blue dress that seemed white to the majority of the population, was regarded with so much astonishment, that it became a worldwide internet sensation overnight. As our brains have evolved in an environment governed by the same regularities that operate today (i.e., mechanical, optical, and acoustic physical laws), we still benefit from relying on the same computations that our ancestors’ brains had used when making decisions that translate sensory information into perceptual judgments and motor actions.

Bitcoin 2017 as an example for faddish human behavior

The year 2017 was a good one for Bitcoin. While the world was Bitcoin crazed, one Nobel Prize winner economist felt that Bitcoin offers a psychological experiment more than it provides investment opportunities.

“I’m interested in Bitcoin as a sort of bubble. It doesn’t mean that it will disappear, that it’ll burst forever. It may be with us for a while,” Noble Prize winner Robert Shiller, professor of economics at Yale University and co-founder of the Case-Shiller Index, told CNBC’s “Trading Nation.”

“To me, it’s interesting as another example of faddish human behavior. It’s glamorous,” he added.

The Bitcoin rush took Shiller back in history when the tulip mania was in swing. It was the 17th century, and the prices of tulip bulbs peaked to new heights, but later crashed in 1637. This was the first recorded event that demonstrated a bubble due to buyers’ frenzy that threw the prices higher than the real value of the product.

Many decision processes in the financial domain have parallels in the perceptual domain. Our sensitivity to light intensity and auditory loudness follows logarithmic laws that resemble the manner in which we encode monetary rewards. We perceive the luminance and size of objects about their surroundings, in a way that resembles framing effects in economic decision-making. Even the compromise and the attraction effects, well-documented phenomena in consumer decision-making, were recently documented in the perceptual domain. These findings suggest that decision biases might arise because our brains apply computational techniques that successfully solve perceptual problems, also when making economic decisions.

A recent study, co-authored by Cary Frydman (USC) and yours truly, investigated the common mechanism across the economic and perceptual domains in the context of a specific decision bias, the extrapolative formation beliefs, also known as the belief in the “hot hand”. People often rely on past observations when forecasting the future, even when they contain no credible information. This tendency is thought to underlie market-level phenomena such as over-reaction to news and creation of a price bubble, like in the case of Bitcoin.

Intriguingly, extrapolative belief formation is also often found in laboratory experiments of perceptual decision-making: people respond faster and more accurately to sensory stimuli that continue an apparent pattern, even when explicitly told that the sequence is completely random. In the study, Cary and I used a within-subject design, where each participant took part in decision-making tasks from both the economic and perceptual domains.

Our goal was to investigate whether people use a common computational mechanism of belief formation when making both types of decisions. This was a test of a 16 years old idea of the above mentioned Robert Shiller, who wrote in his seminal book “Irrational Exuberance”:

“The same human pattern-recognition faculty that we used when we learned to ride a bike or to drive a car, giving us an intuitive sense of what to expect next, shapes our expectations for the market.”

Uncovering the origins of economic decision bias using perceptual judgments

In the perceptual decision-making task (figure below), we asked participants to make a series of perceptual decisions. Every round of the task started with the appearance of a fixation cross in the middle of the screen, which after 800 milliseconds was replaced by either a circle or a square. The chance of seeing either shape was always 50% and did not depend on the history. Participants had to classify the shape by pressing the “left” button when it was a circle, and “right” when it was a square. They received money whenever they classified the shape accurately, and the faster they did so.


We found that when a shape continued a “streak” of similar shapes (for example, a circle appeared after three other circles), participants were more likely to classify it correctly, and were also faster when doing so. This suggests that the participants were implicitly forming expectations about the identity of the next stimulus based on past observations, despite being explicitly told that the sequence was random.

In the economic task (figure below), participants saw a series of events that represented “performance surprises” of a publicly traded firm. These events could be either “positive” or “negative.” Each round, we asked participants to decide how much they were willing to pay for a stock that would be worth $100 if the next performance surprise were “positive,” but $0 if it were negative. In this case, it was optimal for them to pay the dollar amount that equals the probability that (according to one’s belief) the next performance surprise would be positive. The participants did not know that the actual sequence of performance surprises was completely random: the actual probability of seeing either a positive or negative surprise was 50% and did not depend on the history at all.


In this task, Cary and I found that after a sequence of several “positive” performance surprises, participants were willing to pay more for the stock, and the longer the streak was, the more they were willing to pay. After a sequence of “negative surprises, they were willing to pay less, and again, the longer the streak was, the less they were willing to pay. This suggests that just participants were forming expectations about the future based on past observations, and were doing so in a similar fashion to the perceptual task.

Most intriguingly, we found a reliable correlation between the degree of extrapolative beliefs across the perceptual and economic tasks. In other words, people who responded faster and more accurately to a “circle” that preceded a series of other circles (compared to a “square” that preceded a series of circles), despite being explicitly told that the shapes appeared at random, were also more likely to bid more money for a stock of a firm that had a recent streak of positive performance surprises


Our findings may partly explain the pattern of prices in the “psychological experiment” of Bitcoin trading in 2017. As the price went up, more and more people were eager to buy Bitcoin, thinking that the rise will continue. The same happens these days, in the bear market of 2018-2019, as the volume of sellers increases as Bitcoin price goes down – leading to a negative momentum which is unrelated to the currency’s fundamental value.

These results illuminate the origins of extrapolative belief formation in economic decision-making. Humans might be relying on low-level automatic processes that play a role in perceptual decision-making when forming their economic judgments. If this is the case, the formation of extrapolative beliefs might be a cognitive process which is difficult to suppress.

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Large Indian Bank Clamping Down on Cryptocurrencies

One of the largest banks in India is asking its users to consent that they won’t be using their accounts to trade Bitcoin or other cryptocurrencies.

One of the largest banks in India is asking its users to consent that they won’t be using their accounts to trade Bitcoin or other cryptocurrencies. The bank also asks for authorization to immediately shut down an account if it’s associated with digital currencies.

Things Are Not Looking Good in India

On April 6th, the Reserve Bank of India (RBI) ordered all regulated financial institutions to refrain from working with cryptocurrency-related businesses of any kind.

The move was met with a swift response from the industry which challenged the order. However, a few months later, on July 3, the Supreme Court of India upheld the ban, delivering a heavy blow to the entire field.

It wasn’t long before this took its toll on the industry. In October, India’s very first Bitcoin ATM was shut down and both of the founders of the company which operated it were arrested.

In December, Live Bitcoin News reported that the country is allegedly planning to end its statewide cryptocurrency ban. Purportedly, the Government has created an interdisciplinary committee which is figuring out ways to legalize and regulate the cryptocurrency industry instead of banning it straight away.

However, a month later, one of the country’s biggest banks has also gone against crypto.

HDFC Jumps on the Anti-Crypto Bandwagon

A Twitter user CryptoIndia YT (@Cryptoindia) shared that HDFC has requested users to confirm that they won’t use their bank accounts for trading Bitcoin or any other cryptocurrency.

After Kotak and few other Indian Banks.

Hdfc asking customers to visit bank branch and sign this consent letter regarding trading with crypto currencies/

— CryptoIndia YT (@CryptooIndia) January 21, 2019

Additionally, the bank has also requested its clients to “authorize the bank to close the above account without any further notice if it is observed in future that transactions have been carried out for Bitcoin/virtual currencies.”

HDFC is currently the third largest bank in India and it has around 89,000 employees throughout its branches.

What do you think of HDFC going against cryptocurrencies? Don’t hesitate to let us know in the comments below!

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Profitable In-depth Growth Study of Bitcoin Technology Market 2019-2026 Revenues and Analysis …

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SEC Set to Legalize Cryptocurrencies

Hence, cryptocurrencies could obtain the status of legal tender even, which would subsequently make them a viable payment method in the country.

Last year was for the crypto industry a more than difficult one, considering the major bearish trend, worsened by the war that broke out between Bitcoin Cash and Bitcoin Cash SV – when the latter happened, many investors decided to get back at least some of their money, rather than wait for a miracle to come. This brought on a major crypto sell-out.

In a Forbes interview, the UK chief counsel for the Coinbase exchange, Marcus Hughes, voiced his opinion regarding the current situation in the crypto industry to improve in the near future. He believes that within the coming couple of years the industry will go through big changes in the sphere of governmental regulation. He was namely talking about Europe.

Prospects for crypto in the UK

Presently, the British regulator FCA (Financial Conduct Authority), which is in charge of the local banks, is doing research. The outcome of the latter may have the FCA prohibit trading Bitcoin-based derivatives. However, in December, the UK government mentioned that it is ready to direct the FCA to start overseeing virtual assets.

Besides, the watchdog is looking into nearly 20 startups that deal with crypto, as reported earlier by The Telegraph.

The head of the Treasure-based committee of UK lawmakers, Nicky Morgan, confirmed in an interview that the FCA and the whole British government are worried about the absence of regulation regarding digital assets, the fact that customers are hardly protected, and that crypto is actively used for money-laundering by some. The committee, as per Morgan, will keep insisting that regulation should be introduced.

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Chances of crypto regulation in Europe

Hughes also mentioned that the European regulator working with banks (EBA) is also urging for crypto to become regulated in the near future in order to protect investors in this type of asset on the continent.

He even assumed that each EU country may finally launch its own crypto, but the most certain outcome is that common regulatory rules will start to be used around Europe. This, believes Hughes, would make it much easier for crypto exchanges to operate in the market.

The way major banks view crypto

Hughes came to the crypto industry from Morgan Stanley bank. He shared with Forbes that top executives of the bank believe in the potential of crypto and Bitcoin in particular. They expect this influence and power to remain in the coming years, too. Apart from that, he mentioned that other major banks are also interested in working with Bitcoin. What stops them now is the absence of proper regulation around the world.

Besides, Hughes believes that as soon as virtual coins move from the stage of speculation into the stage of practical use, more and more people will get to understand them and, therefore, accept this new class of assets.

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Major Central Bank Institution BIS: Bitcoin Must Depart From Proof-of-Work

According to the paper, when in the future Bitcoin’s block rewards fall to zero — given that only a limited number of new Bitcoin will ever be created …

Bitcoin’s (BTC) problems are only solvable by departing from a proof-of-work (PoW) system, according to research published by the Bank for International Settlement (BIS) on Jan. 21.

According to the paper, when in the future Bitcoin’s block rewards fall to zero — given that only a limited number of new Bitcoin will ever be created — transaction fees alone will not be able to sustain mining expenses. The argument implies that the Bitcoin network would become so slow that it would be virtually unusable, stating:

“Simple calculations suggest that once block rewards are zero, it could take months before a Bitcoin payment is final, unless new technologies are deployed to speed up payment finality.”

The study further notes that while second-layer solutions like the Lightning Network could help, “the only fundamental remedy would be to depart from proof-of-work.” Such a departure, according to the report, would “probably require some form of social coordination or institutionalisation.”

The document’s overall conclusion is that, according to the researchers, “in the digital age too, good money is likely to remain a social construct rather than a purely technological one.”

The Switzerland-based BIS is an organization consisting of 60 central banks, which reportedly account for 95 percent of global GDP.

As Cointelegraph recently reported, another BIS report published on Jan. 8 found that seventy percent of central banks worldwide are conducting research into central bank digital currency issuance.

Another report published by the BIS in September last year found a strong correlation between crypto prices and news of regulatory intervention globally.

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