Human failure – behavioural psychology and investing in Cryptocurrency

Bitcoin

What makes us all invest stupidly? Behavioural psychology!
……..Now what about Cyptocurrency?

I accept the headline is a bit strong but how is it that so many people allow themselves to be duped into making an investment when they have no idea what they are investing in, and how do you avoid it!?

For several years we have studied investing taking into account behavioural psychology. However, amazingly, despite all the published work on it people continue to follow “big news” and follow others down a route with no awareness of outcomes.

Cryptocurrency – the latest “must have” investment

I intend to write a piece about Cyptocurrency in the coming days mainly because I have clients contacting me to know if they should invest and what I would recommend. Let’s be clear, Cyptocurrency is not currency, its just a made up name for what the US regulator views (correctly) to be a derivative bet. It has no regulator and no physical presence, and due to its nature, it is unlikely to ever have the latter, although it probably does not want the former! If I was to say go and buy some derivative based on the value of Gold, but not physical gold (not the asset), but on something that mirrors the value of Gold and has no regulation most people would turn around and say, WHY?

Behavioural psychology

Behavioural psychology

As I say I will write another blog about Cryptocurrency, but first I want to highlight someone who has started an FCA regulated company trading in Cyptocurrency. He posted a message on LinkedIn and got 117 likes in a matter of hours with many “congratulating” him for his world first of having a company limited to 30 investors with a maximum investment value of £155,000! Did anyone actually bother checking before they liked the article? Do they care? So, how come so many people not in the financial services industry had liked the article when it is likely they had never tested, never seen, not even understood (some of them) what the article was about or the connection with a limited 2 man band company that had been regulated less than 2 weeks. Indeed the other “world leading company” mentioned turns out to be also a two man company, and one of the two people in both companies are the same person!

People are quick to like a name like cryptocurrency because, like IT tech companies in the late 1990’s, web companies around the same time, the oil surge of a few years ago,…… people flock around an idea. When enough of them do, then other people feel they are missing out on something, or they base a decision on the fact that “others” must know more than they do, or something that they do not. They, not understanding what it is they are investing in, or even why they are investing, become susceptible to forcasts and news. Some then turn to people like me, maybe to re-inforce their idea, or to stop them from doing something stupid.

One client contacted me in December telling me he was having a “punt” as he had read that BitCoin was only heading in one direction and that people were making a fortune from it. He was right, it was only heading in one direction (down since then) and people had in deed made a fortune, it was just that he was not going to be one of them! Yes, Bitcoin will bounce back (maybe), and people will continue to make and lose fortunes on it, but there is nothing magical in what has gone on, and will continue to happen. It’s a derivative bet no different from investing in a synthetic derivative that has been around for years. Warning – the FCA suggested that synthetic derivatives should not be sold to retail clients many years ago without big warnings as to their likely future failure.

Then at the weekend I read a brilliant piece about behavioural psychology, “Why We Listen To Bad Forecasts” by Morgan Housel. Morgan wrote one paragraph which I thought brilliantly summed up people:


When things are calm people believe what they tell themselves. When things are crazy they believe what other people tell them.
Have a read of the whole piece here


Is Cryptocurrency going to replace currency, is it even currency, or is it crazy? However, there are so many people prepared to forecast the imminent demise of real curre3ncy, or the future value of speculating in cryptocurrency, that I almost feel out of place writing this article. He also enlightened us on another matter which he does not compare to what is going on with Cryptocurrency at the moment, but I think there is a great comparision:


“It’s like playing Russian Roulette without knowing whether the gun has three chambers or a billion chambers. If the stakes are high and you have no idea what the odds are, you pay attention.
That’s not an excuse for heeding bad forecasts. We know enough about the types of people who make wild investing forecasts and their incentives to safely discount a big portion of babble. But it’s an explanation for why people do it.”


Reality check – top draw investments and knives comparison

When considering an investment you could say it is a bit like attempting to buy yourself a new knife for the kitchen. Buying a knife should be based around the objective; surely you are not actually targeting the knife, new or otherwise, but the ability to cut food!?

Top Draw Investments – the starting point

With an investment, pretty much the only thing you can go on is the packaging, name, reputation and past performance and whether it is real or synthetic. Do you want a synthetic knife to theoretically cut food, or do you go and find a knife that meets your objective?

All of you who want a synthetic product, then as long as you understand the risk reward curve, then cryptocurrency is for you and I am sure that 2018 and 2019 will be an interesting ride.

Forensic Review

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We offer a forensic review of your current offshore pension or SIPP and investments they hold. The fact is that increased investment reviews combined with lower charges may make a significant difference at retirement by boosting potential returns according to research published in the New York Times.

Have you been caught out? Some offshore salesmen promoting QROPS as an investment solution live in a parallel universe where they claim to make world stock markets behave differently by transferring pension funds offshore, than if the same funds are used from and within UK pension funds. Think and behave logically, if promises of bigger returns can only be achieved by moving to a QROPS or International SIPP then why hasn’t the entire UK pension industry moved offshore? It hasn’t!

 

A Must Read For All Expats With A UK Pension
End of article: Human failure – behavioural psychology investment belief

The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up to date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not except any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.

This article was published on 27th March 2018


“About

James Pearcy-Caldwell

I have lived in various countries, but always remained firmly attached to the good old UK. My only goal is to take the experience and insider knowledge that I have, and be transparent with people so they understand the impact of their decisions.

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