I have been studying behavioral finance recently and have learned a lot of knowledge that I would like to share with you.

Let’s first talk about two concepts in cognitive psychology.

Bayes' rule: This rule holds that people will make judgments and decisions based on the "prior probability" and "posterior probability" of things under uncertain conditions.

Prior probability: people’s early understanding of the probability distribution of various unknown variables under uncertainty;

Posterior probability: People update the prior probability distribution after obtaining new information. It emphasizes the rational characteristics of individuals in making behavioral decisions under uncertain conditions, that is, people will continue to learn and adjust based on the new information obtained.

In most cases, decision makers only obtain part of the information related to the decision, and the authenticity and validity of this information cannot be absolutely guaranteed; on the other hand, obtaining sufficient information cannot provide the parameters and variables of the optimal solution, and decision makers are required to infer, estimate and refine the existing information.

However, the reception, processing and handling of information is an activity that consumes a lot of cognitive resources. In most cases, economic entities are in a state of limited rationality: that is, they follow the basic cognitive process from investigation, analysis, inference to decision-making, but they cannot have unlimited computing power and accuracy.

So many times we only make decisions based on the incomplete information we know. As time goes by, we are exposed to more and more information, and new information constantly supplements our knowledge, and investment decisions will also be adjusted and changed accordingly. What is meant by seeking truth from facts? When the facts change, or when we know more, the corresponding views and decisions also change. This is why traders change direction every day.

Therefore, we should participate more in projects with traffic, because these projects themselves have a certain possibility of success. These projects with traffic can show us that we have stood out from a group of competitors, whether it is luck or strength. Since we have come this far, there is no reason not to pay attention.

Because no one can be "omniscient and omnipotent", investing is all about following probability and an investment system of your own design, for example: cut losses and let profits run.

I once read a novel in which someone said to the Buddha: If you are compassionate, you are incompetent, and if you are competent, you are not compassionate. This is to describe that even the Buddha cannot be omniscient and omnipotent to save everyone. This is also true in investment. No one can foresee all possibilities, and there is no investment that is guaranteed to make money.

From my current perspective, omniscience and omnipotence are somewhat paradoxical. For example, if CZ, Musk, Jack Ma, or Pony Ma were invited to work on a project, I believe most people would be likely to invest and would likely also receive excess returns.

However, things are unpredictable. As a professional scythe in the cryptocurrency circle, Huobi's Zhu Ye has also cut many people. When he was about to build a cube, claiming to raise it to $200, he never expected that the huge losses caused by the investment in Luna would strengthen Du Jun's determination to sell the company, so all projects were stopped, and the 100 million yuan originally prepared for the cube was also shelved. As a packaging, the test network, Dex, and airdrop on Cube have been done, but it was still hastily ended.

Have you seen that Ant Financial's listing in Hong Kong was halted on the eve of its listing, and it became "Ma has already stopped". I believe that those who can participate in Ant Financial and share a piece of the pie have energy and ability that ordinary people can't imagine. Even Ant Financial's achievements and configuration, how many people want to invest but can't, such a perfect project, but it fell before dawn.

Why Raca is so popular? Because it is connected to CZ and Musk, and even Musk's business empire Space X. I learned a sentence a long time ago: you don't need to be really good in finance, you just need to look good. After seeing Ant Financial's achievements and investment lineup, will anyone still care about its operating model? I vaguely remember the excitement of a friend who won the Ant Financial IPO: "How can this be a loss?"

Ant Financial may be a real bull, while Raca is a fake bull, but they both blew up a huge bubble. Those who can see through the essence are destined to have a different life from others. But my goal is to become someone who can see through the essence, dance with the bubble, and have the determination to turn around and leave before the bubble bursts. As long as it is a bull, no one cares whether it is real or fake.

We can take a look at the different perspectives and levels of cognition of different people in a case.

Assumption 1: This person has no inside information, is not good at analysis and investment research, and even has very poor execution. Then in Cube, he can't even get the testnet airdrop. He may just have heard that Huobi is going to build a new public chain. Oh, when he knew about it, the price had already risen from 0.5 to 10 yuan. But Huobi is very good at cutting people, so why not see if he wants to get on board.

Maybe he will buy it, maybe he won’t. But in this case, he will most likely lose money, because Zhu Ye really didn’t accomplish this thing. But we can’t completely deny him. Profit and loss come from the same source. Since he has a way to lose money, then he naturally has a way to make money. If Zhu Ye really accomplished this thing, and the cube rose to 200, and he didn’t get washed out midway, I think he would have no problem making a profit. Even if they experienced the same journey, I think everyone’s gains and results should be different.

Hypothesis 2: This person is a real expert. Based on his past experience, as well as observations of the resources spent on Cube, the team's ability to do things, the amount of Cube's airdrops, and so on, he determined that Huobi might be about to make a big news and do something fancy with Cube. The short-term price of Cube cannot be judged, but in the long run Huobi will definitely push it up, but it is hard to say how much. Then, through some resources, it was confirmed that the people on the Cube team are the same people from the previous heco team, and Cube is currently a project that Huobi attaches more importance to.

Then he bought it, but if such a person is good at trading, he will also lose money on Cube, but the loss is limited. But if he is superstitious about insider information and trusts his own judgment too much, it cannot be said that he originally made a judgment based on his own experience, strengthened his logic through some clues, and learned from the mouths of Huobi’s internal employees, which once again strengthened his logic. It is possible that he lost everything. Then I think that in the process of Cube falling from 15 to 0.5, there is always a moment when it feels cheap, and you keep buying and then selling at a loss. Therefore, you must build your own trading system, or even just simply set a stop loss. It doesn’t matter if it falls, just sell at a loss, and wait for it to show signs of rising, and then buy again.

Assumption 3: This person is as wise as a god, and he discovered the essence of Cube faster than the previous person, which is the internal operation of the Huobi team. He actively participated in the airdrop of the Cube test network, eliminated other teams that were brushing the volume with the correct method, and exchanged the fees for leasing IPs and nodes for real money Cube tokens (some friends did achieve 50 Cubes on a single account).

At the same time, I bought a part of the position as soon as Cube was issued. As the price of Cube went up, I also added positions, for example, when it was below 10 or below 5. To be honest, if you are not from Huobi, it is difficult to fill the position in such a price range. Then, with such a position in the range above 10, I started to open champagne, and then a big negative line came down. It is really difficult to tell whether it is a wash or a smash. It is likely that the loss will be stopped at the original price, or even a loss.

"Heaven's will is constant, it does not exist for the sake of Yao, nor does it perish for the sake of Jie." Since you have chosen the investment path, all you can do is "accept it". You don't have to worry about why you still meet such an outcome despite your careful thinking. Be yourself and be able to accept everything, that is the right way.

The so-called prior probability and posterior probability mean that in this process, we should constantly supplement and learn our own knowledge. In this way, we can use "posterior probability" to constantly adjust our investment strategies, bravely acknowledge some previous details, and even after understanding some factors, it is understandable to decisively cut positions and leave.

That's all, Dror.

Author: Beyond, Twitter @Beyond0x009; Editor: Gemini, Twitter @Gemini0x17