Shiba Inu Fans Are Falling Prey to Cognitive Biases

Shiba Inu (CCC:SHIB-USD) is a dog-themed altcoin that has grown in popularity recently. Someday there will be plenty to analyze in hindsight about all the worthless altcoins. One of them is SHIB.

A smiling Shiba Inu dog in front of a bright yellow background.

Source: Shutterstock

Like I said, SHIB is popular, but that does not mean that it is a great idea. Often, when an asset like a stock or crypto gets written about, that’s a sign it’s really about to slow down. In the majority of these cases, the rally in these assets is near its end, as it becomes harder to find new buyers to keep the uptrend alive.

Buying near the top means sustaining losses afterward. I believe that Shiba Inu has gained interest and delivered huge pains to its investors based on some common investment biases.

Shiba Inu: What Is It?

CoinMarketCap offers this humorous explanation of Shiba Inu’s origin:

“Once upon a time, there was a very special dog. That dog was a shiba inu, and this dog inspired millions of people around the world to invest money into tokens with the dog’s image on it.”

There’s one thing that I like about Shiba Inu: a campaign to rescue shiba inu dogs:

“SHIBA INU has also created a campaign using Amazon Smile in order to collect donations for rescue real, live Shiba Inu dogs with the Shiba Inu Rescue Association.”

I applaud this action. But the SHIB token has no value. It is a highly speculative meme altcoin with no business purpose and zero intrinsic value. Of course, speculators will disagree.

Ranked at #11 on CoinMarketCap, Shiba Inu has a $19 billion market capitalization with nearly 395 trillion coins in circulation out of a maximum of 1 quadrillion. $19 billion of a market cap for an altcoin whose motto is “we love shiba inu dogs” is a textbook definition of a bubble.

Investment Behavioral Biases

CFA Institute has identified key traits that point to cognitive bias:

“Behavioral biases potentially affect the behaviors and decisions of financial market participants. By understanding these biases, financial market participants may be able to moderate or adapt to them and, as a result, improve upon economic outcomes. Behavioral biases may be categorized as either cognitive errors or emotional biases. The type of bias influences whether its impact may be moderated or adapted to.

“Cognitive errors stem from basic statistical, information-processing, or memory errors; cognitive errors typically result from faulty reasoning.

“Emotional biases are harder to correct for because they are based on feelings, which can be difficult to change.

“Emotional biases include loss aversion, overconfidence, self-control, status quo, endowment, and regret aversion.”

These emotional biases support the Shiba Inu price.

Investors tend to feel a much greater emotional effect from a loss than an equal value in gain. If Shiba Inu declines 40%, it is harder to accept it than a similar 40% increase in its price. Investors in a selloff may hold on to their losing positions for too long.

Overconfidence happens when investors overestimate their level of knowledge or forecasting skills. They believe that Shiba Inu can move much higher in the future.

Investors are much more interested in short-term small gains rather than pursuing the prospects for a much bigger profit in the long term. That means that small and quick gains are desirable supporting increased volatility in the price.

Investors have a tendency to avoid taking action, because they fear making a wrong decision, meaning that they will not want to sell SHIB when they should. After all, if it moves higher they’d regret it.

It’s also easy for investors to avoid rebalancing their portfolios. A small investment of $100 in Shiba Inu would buy a huge number of coins. For most, losing $100 would not lead to bankrupt. So some might invest for fun and fail to sell when they need to.

These emotional biases are harder to correct for than investments based on logic. Emotional investing is not always the best way to succeed. It’s important to question the value you’re getting investing in Shiba Inu. To me, SHIB has absolute zero value. Still, people invest in it based on emotions. That’s not a sound investment philosophy.

On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.


Article printed from InvestorPlace Media, https://investorplace.com/2021/10/shiba-inu-fans-are-falling-prey-to-cognitive-biases/.

©2021 InvestorPlace Media, LLC