Volatility - Our Achilles Heel
Level 4: Serious Player
Future Guardian,
You know what really messes us humans up?
Volatility.
We have this seemingly strange programming built in that does NOT allow us to understand very well the nature of volatility and its impact on our lives.
We see up, we feel like it's all gonna go up.
We see down, we feel like it's all gonna go down.
Yet, we live in a world where nothing goes up continuously and everything that goes up must come down.
(Sometimes they go back up, and sometimes with a long enough time horizon the up is seemingly inevitable, but you have either ignore what's going on, or accept the volatility)
Let's talk about our basic human programming, why we are like this, and what we can do about it now that we have clarity.
Our basic human programming
There are several biases which relate to how we perceive past present and future events - explaining how our future perception is impacted by our past experience, and how this plays together to make volatility something we can't naturally handle well.
Recency Bias: This bias leads people to weigh recent events more heavily than earlier events. This is possibly the bias most directly related to that dynamic of "up = going up more." This is one of the most common experiences in Crypto, where we'll see a coin start to go up and people will literally draw lines on graphs up into the clouds.
Confirmation Bias: This involves favoring information that confirms existing beliefs. This one is tough, because we live in a world where it's possible to confirm ANY belief you might have. Think about whatever it is you might question, and it's most likely possible to find a viewpoint which will support what you want to hear.
If you start doing well in business, chances are you'll find people who will tell you your doing well and you should keep going, but if you're suspicious about your success, you'll probably find people to confirm that suspicion. This bias feeds into our natural expectations - up = more up - and therefore serves to set us up for failure when volatility inevitably hits.
Overconfidence Bias: This bias leads individuals to overestimate their knowledge or ability to predict events. This bias feeds other biases. Remember that bad thing which just happened? You're gonna think you're really good at predicting what will happen next (down go more down).
Availability Heuristic: This cognitive bias involves overestimating the likelihood of events that are more readily recalled. Another related bias that has us overvaluing recent experiences and feeding our future perception and expectation in a way that is not useful.
Anchoring Bias: This occurs when individuals rely too heavily on an initial piece of information (the "anchor") to make subsequent judgments. This happens all the time in marketing, where you're exposed to a higher price and then a discount is presented to you. But you can also see this in situations like Crypto, where especially in the case of a bull run, you may see MANY people talking about how some coin is going to "moon."
Understanding these biases can help in recognizing and potentially mitigating the misperception of volatility in various domains, such as financial decisions, health behavior, and interpersonal relationships.
Before we get into that, I want to visit an interesting scientific study, which also supports the impact of these biases, how we perceive Volatility, and how it impacts our decision making.
The phenomenon where past experiences, particularly recent ones, shape our expectations and perceptions of future events is a complex interplay of memory, perception, and cognitive biases.
How Expectation Influences Perception: This is a study conducted by researchers at MIT where they explored how the brain encodes prior beliefs and utilizes them in controlling behavior. In their experiment, animals were trained to reproduce time intervals in different contexts (short or long).
The study found that animals, like humans, tend to bias their responses based on prior beliefs. For instance, if they expected a short interval, they would slightly underproduce an 800-millisecond interval, and overproduce it if they expected a long interval.
In other words, their prior experience significantly influenced how they perceived and responded to future similar situations.
It makes sense that we'd be built this way from a survival perspective. But in our modern life, this built in "programming" (and all the above biases) leads us to be vulnerable to these situations which are instigated by Volatility.
Instead of worrying about survival in the wild, we are exposed to Information Overload, Rapid Paced Environments, Social Media Echo Chambers, a higher degree of Complexity and Uncertainty in everyday life, Rapid Technological Advances, and all the impact this has on our attention span, perception, and beliefs.
BUT WHAT DOES THIS ALL MEAN???
Enough of the Biases and the Scientific Research Papers. Let's get down to the meat of it.
What the hell does this all mean for YOU in your life?