Nobel prize-winning economist Daniel Kahneman is often considered one of the father’s of behavioral economics. A study carried out by CrypoDatum.io integrates Kahneman’s ‘cognitive ease’ thesis with cryptocurrency ticker to show the impact they have on price and profitability, May 30, 2019.
‘Cognitive ease’ is a behavioral theory that claims humans tend to understand something better when they associate it with a positive image rather than a negative attitude or perception. Historically, as shown in Kahneman’s book Thinking Fast and Slow, NYSE stocks with more pronounceable tickers performed better than stocks with off-putting tickers.
This same cognition theory, like any, can be pulled over the cryptocurrency markets. Advertisers and markets often push the idea that no exposure is bad exposure – this survey proves that to be inaccurate.
The main hypothesis behind this research was to figure out if a readable and memorable name for a cryptocurrency influenced its price on exchanges during the first week. Cryptocurrencies with proven reputations and difficult tickers like XMR, XLM, BNB do not fall victim to cognitive ease biases as they are already perceived as reputed coins in the market.
The study compares two instances: one where the ticker is pronounceable out loud like BAT or ADA and another where it can’t such as BSV or XRP. Results showed that the mean return of the readable class was higher than that of its non-readable peers. The difference stays huge at the start but slowly reverts to a normal level over time – similar to what happened with MATIC. A key inference from this is that the ticker has an effect only during the initial week or two, after which the performance depends on continued perception, which drives liquidity and fresh investments.
The hypothesis seems to hold true to some extent and offers meaningful insight for the short run. However, correlation doesn’t equal causation, so it’s difficult to truly understand if this correlation is the reason for their behavior.
Behavioral Anomalies in Crypto
There are several key behavior anomalies in crypto, the most prominent one which most people ignore is that of CME futures. The futures contracts aren’t settled in Bitcoin but by cash for differences (CFD). Yet for some reason, these days cause massive volume and volatility even on regular exchanges that are technically unaffected by CME positions.
It’s possible that the high liquidity traders on exchanges are also present on the CME futures platform, so they try to push the price into their preferred direction.
Behavior and psychology are often undermined by traders, but integrating price action, fundamentals, and behavioral economics will lead to the most effective tool to analyze and understand what the market is doing.