The content was originally uploaded from the Twitter account @thedefiedge, which discusses the cognitive model in the transaction process, compiled by BlockBeats.
Warren Buffett and Charlie Munger used mental models to become the greatest investors in history.
There are hundreds of mental models, and I found 14 of them that can help you become a better crypto investor (including common cognitive pitfalls):
What is a mental model?
Mental models are concepts that help us better understand the world.
Your thinking is limited by your experience and biases – mental models are a way to free your mind from biases.
Knowing them will help you think more clearly.
1. The Cockroach Theory
When there is bad news, there may be more bad news.
Seeing a cockroach means there are more cockroaches in the dark.
If there is bad news for a company, keep in mind that they are probably buying time to hide more bad news, like Celsius.
When Terra Luna and UST collapsed, we knew it was bad, but many underestimated the reach of the bears.
Other roaches such as Celsius and Three Arrows appeared.
So whenever there is bad news, be prepared for even worse.
2. Three people become tigers
This is a Chinese proverb. If a lie is said a thousand times, it may have the same influence as the truth.
Imagine if there were rumors about tigers:
Person 1: He is a liar
Person 2: Is this true?
Person 3: There are tigers!
Now, imagine thousands of people sharing on social media.
Combined with bot accounts and financial incentives, it’s easier than ever to spread misinformation.
Beware of rumors without any facts or evidence.
3. The inevitability of behavior
Human behavior and its biases will always be there.
“History does not repeat itself, but it always resembles strikingly.” -Mark Twain
It’s interesting that some books written thousands of years ago still feel so relevant today.
I am applying this idea to the next cycle.
Humans are greedy.
• Will there be more real world applications? Yes.
• Will there be better technology in the next cycle? Yes.
But will there still be Ponzi economics and cult leaders? Yes.
4. Acton’s Law
“Power breeds corruption, and absolute power breeds absolute corruption.”
We saw that many of the main characters in this cycle were destroyed.
Daniele, Andre, Do Kwon, Su Zhu, and others, watch out for big shots
– Most people are incapable of holding power.
5. Brandolini’s Law
The nonsense principle of asymmetry.
It takes an order of magnitude more energy to refute bullshit than to generate bullshit.
• Write a thread on Luna / Anchor = thousands of likes.
• Write a post critical of Luna / Anchor = enemy and harassment.
Every cycle, there are always some cult projects, and fighting them takes too much energy.
6. Black Swan
Known Unknowns – Risks you know about, such as smart contract vulnerabilities.
Unknown Unknowns – Risks so unimaginable that you cannot foresee them coming.
Examples include the 9/11 attacks, the pandemic, or the 3AC collapse.
We tend to underestimate the impact of black swans.
Diversifying your horizons can help guard against these events, and focus more on things outside of encryption.
Imagine the following events and their effects:
• Satoshi wallet awakened
• World War
• nuclear war
7. Pareto principle
The Pareto Principle states that 80% of the consequences come from 20% of the causes.
The principle was proposed by Vilfredo Pareto, who found that about 80% of the land in Italy is owned by 20% of the population.
This applies everywhere.
• 80% of revenue comes from 20% of agreements.
• 80% of trading profits come from 20% of traders.
8. Network effects
As more users join, the product will become more valuable.
Think of how much Facebook would be worth if no one was using it.
Once a company has a network effect, it becomes an economic moat and therefore hard to surpass.
When you are investing, consider which protocols are positioning themselves for network effects.
For example, there are quite a few people trying to build a decentralized social network, but due to network effects, only one person can win.
9. The Lindy Effect
The longer something lasts, the more likely it will continue to last.
It’s hard to say which coins will still be around in 20 years, but there’s a good chance BTC and Ethereum will still be around.
Therefore, they are the safest investment option.
I have no idea how much money I have lost due to DeFi hacks and exploits.
So if you’re staking assets, it makes sense to choose more Lindy assets such as Aave and MakerDao.
If they were hackable, it would have happened long ago.
Pain and fear are an integral part of all living organisms, and self-preservation is the act that ensures their survival.
I don’t believe in the concept of HODL, when danger occurs, people become scumbags.
11. Understand the core of the game
A word in chess – it means the game revolves around controlling a valuable space or resource.
• Streaming companies are fighting for content.
• The world fights for oil and scarce resources.
Identify valuable resources and players who fight for them.
We saw this in the Curve wars.
Stablecoin liquidity is a valuable resource and we are seeing protocols vying for CRV/CVX tokens.
What valuable resources will future agreements strive for?
12. Indirect influence
Every action has a consequence, and those consequences lead to more consequences.
Most people only consider the immediate impact and see no additional impact.
When something happens, think: Then what?
I always think about this whenever the protocol makes changes to the token design.
An example: the protocol wants to reduce token issuance to slow inflation, what are the possible second-order effects?
• Lower emissions mean lower APR
• Lower APR means less usage and liquidity (because there are less reward incentives)
Unless the protocol has sufficient network utility, or other incentives, people will leave.
When considering decisions, stretch the timeline.
Suppose I eat a cheeseburger, I will think:
• Immediately (delicious!)
• 1 week (with a little weight gain)
• One year (this habit increased my cholesterol)
• Decades (heart attack)
We are not good at long-term thinking.
You are riding the wind and waves.
In this case, it means identifying and exploiting trends early on.
• Amazon caught the Internet wave early.
• Netflix started out as a mail-order DVD store, but turned to streaming because they saw the wave coming.
You need to spot trends early, ride them as hard as you can, and get out before it stops.
• Spot trends early (spot waves)
• Invest (follow the trend)
• Profit all the way (leave the wave before it collapses)
14. First-mover and second-mover advantages
Getting the protocol to market first may have some advantages.
Either through brand recognition, switching costs, or purchasing resources in advance.
But there is another, called the latecomer advantage: come later, but can improve the technology.
I’ve seen this happen in a Layer 1 game.
It feels like there is a hot new protocol layer project every few months.
But DEXs or lending platforms will have a significant first-mover advantage.
The above are just a few of all mental models.
I encourage you to study more mental models, and I believe that the crypto industry will produce unique mental models.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/briefly-describe-14-mental-models-in-the-crypto-market/
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