What advertising and market bubbles have in common
On the 15th December 2018, Bitcoin hit a low of $3,122. The news was bad, and the sentiment terrible. Nine days later, on Christmas Eve, Bitcoin traded at $4,236 — up 35.68%.
And it wasn’t just Bitcoin, Ethereum and the rest of the top alt-coins jumped too.
During the first half of December 2018, the media was reporting the end of Bitcoin, comparing the sub $4,000 price to the all-time high.
A week later, the same reporters were talking about a cryptocurrency bottom and pointing to Ethereum which had just moved up 98.7%.
The majority of investors in cryptocurrencies don’t take the time to figure out how the cryptocurrency or any other financial, markets work. Instead, they are influenced by the opinions of others.
It’s not because they are lazy. It’s because they are acting instinctively. Following the opinions of others is a natural human behaviour pattern. It feels like the right thing to do — especially when you’re uncertain of the steps to take.
Who else knows about this pattern? Apart from the media, industry, and corporations worldwide — just about everyone who uses influence to make a living. A large part of successful speculation is understanding the crowd.
Life on Mars
Instead of getting caught up in the technical minutiae the 5%, the most successful investors and speculators, figure out if the conditions are favourable for the mass adoption of blockchains? The majority, the 95% don’t. Instead, they go in search of a guru until they find what they want to hear.
In a globalised, interconnected world, it’s all about trust.
Before globalisation, mass influence wasn’t possible at the scale and speed of today.
Do you remember your first holiday overseas? — perhaps it was to France, or maybe Spain, Australia or New Zealand, the US or Canada?
Australia in 1984 was very different from the UK. It may as well have been Mars. Back then, home entertainment “Down Under” meant a pool table in the games room and a 14-inch colour portable with a coat hanger jammed down the back — (If you were lucky.)
In 1984, try telling your mother you loved her from Sydney on Christmas day. The line was jammed for hours, and the calls cost £3.00 a minute. And that was 1984 prices. It was a time when keeping in touch meant writing a postcard or a letter. In 1984, phone calls home from Australia were for Christmas, birthdays and emergencies.
Today, living away from your family and friends is just that little bit easier. We talk to our loved ones on video via Skype and share our lives via Facebook. Today, it’s much easier to be away from the ones you love, but did you ever think about the cost?
One of the main disadvantages of the world we live in today is how easy it is to be influenced by the opinions of others.
In the pre-internet world, countries still had a degree of local specialisation. Today, in most developed countries, we listen to the same music, we watch the same movies, and we drive the same cars. Yes, we can be away from home, and still feel like we are connected to our loved ones, but the mechanism we use to do this also can influence our opinions.
In March 2018, the Guardian newspaper and Channel 4 News broke the story that Facebook was using their users’ data without their users’ permission — and companies associated with Facebook were allegedly using the data to influence voters in democratic elections.
The media used the term “harvesting” to describe the process of collecting the source data. The story was presented as a potential threat to democracy, but the big takeaway is that once the original dataset was created from the original user information it is very difficult, if not impossible, to link the new dataset back to the original data — unless a technology is put in place to change the way data is made secure. A possible solution? Use a blockchain.
In an interconnected world that relies on global supply chains, is there a mechanism that has the potential to neutralise the rise of nationalism and less trust between nations? What about using smart contracts running on a blockchain?
In Code Yellow, we discussed a simple way to evaluate a cryptocurrency. Instead of plowing through endless “hype and quote” articles, looking for an opinion that matches your own, and instead of sliding down the rabbit hole of highly technical articles, take a step back and start by asking:
What problem does the cryptocurrency or blockchain solve?
Is it scaleable?
If you decide, based on your research, a cryptocurrency or blockchain has the potential to attract the crowd, then what are you going to do if the crowd arrives?
In 2017, Morgan-Stanley analysts estimated the amount of money managed by hedge funds has grown by a compounded 15% per year to $1.5 trillion, and that around 48% of them use quantitative techniques to uncover edges and drive investment positions.
In 1968, three social psychologists conducted an experiment. They got a group of actors to stand on a street corner and look up, pretending to stare and point at something. The psychologists started out with one person standing on a busy street corner in New York City and had that person lookup at a six-floor window. They were measuring two responses from the people who passed by. One, did the passer-by lookup? Two, did the passer-by stop?
During the experiment, which was conducted in several one minute intervals, the number of actors standing on the street corner was increased from 1 to 15 incrementally.
When one actor was standing alone, staring up and pointing, only 4% of the public stopped. When the psychologists increased the number of people to 15, 43% of pedestrians stopped.
But how many looked up? When a single actor was used 43% of passing pedestrians looked up, (but only 4% actually stopped.) When the number of actors was increased to a crowd of 15, 86% of pedestrians looked up, and 43% stopped.
This experiment showed that the number of people influenced to react and join in depends on the size of the crowd.
You might think this experiment demonstrates conformity, but that’s not it. What this experiment shows is how effective social proof is in influencing human behaviour.
As the crowd looking up and gawking grows, the passers-by, assume, reasonably, that there must be a good reason to stop and stare.
During the 1920’s businessman, Sylvan Goldman had invested in several small grocery stores. Influenced by what he’d seen while working in California, Goldman returned home to Tulsa and founded Oklahoma’s first supermarket chain — Sun Grocery Company.
In 1929, just a few weeks before the Stock Market Crash, (that led to the Great Depression), Goldman sold his chain of supermarkets to Skaggs-Safeway. But even though Goldman had sold his business, he lost almost all his fortune during the Wall Street Crash.
By 1934, the recovery was underway, and Goldman found backing to purchase five small grocery stores. He called the new business Standard Grocery. Goldman noticed that shoppers in his stores, stopped shopping when the hand-held baskets they were carrying became too heavy.
Goldman came up with a new idea. He invented a basket with wheels. The shopping cart.
Nobody used them. Men thought the carts were too effeminate. Women thought they were too much like pushing a baby stroller. In a moment of marketing genius, Goldman got his employees to walk around the store, placing goods in the cart.
Human beings are imitation machines. Only when shoppers saw other people using the carts did they start using them. The reason? Social proof. Just like the experiment on the street corner in New York, as more people used the carts, more and more people began to use them. It’s a positive loop.
Goldman died rich.
The reason why social proof is such an influence on us is that of uncertainty. We are hard-wired to avoid uncertain situations, and this behaviour pattern shows up everywhere. Even today.
Think about situations you’ve been in. Have you ever been in a position where you knew what to do, but instead of acting, you stood back and watched what other people were doing?
This behaviour pattern of holding back and observing others is called pluralistic ignorance.
The Man in the Hathaway Shirt
Your uncertainty is one of the causes of FOMO. In 2017, during the cryptocurrency parabolic rally, news about this new technology travelled fast. People wanting to profit from investing in Bitcoin or any of the other top alt-coins had to make a quick decision. Because of the unfamiliarity of cryptocurrencies, many individuals stood aside and watched what others were doing.
As prices went higher and higher (without them), their anxiety levels rose. There are two types of fear associated with speculation and investing. The fear of loss, and the fear of missing out. Behavioural science has discovered that the pain of losing is 250% more intense than the pleasure of winning, and this psychological tendency is a pattern that can and is exploited.
The public hears about a new technology. It’s everywhere. Every time they watch the news, every time they use Youtube, Twitter, or Facebook, everyone seems to be talking about this thing called Bitcoin — and yet they have a problem. They have no idea what it is.
In 1994, George Loewenstein, a behavioural economist at Carnegie Mellon University ran a series of experiments in an attempt to answer this question: What makes people interested?
It’s called Gap Theory.
Loewenstein found that people become curious when they have a gap in their knowledge, but Loewenstein found something else too. Gaps cause people pain.
Remember, we feel the pain of losing much more intensely than the pleasure of winning, and, because of this, Loewenstein found that people go to elaborate lengths to close the gap.
It’s an itch they have to scratch. This is the reason why you might have stayed up late and binged watched Breaking Bad on Netflix. A chemistry teacher, mocked and disrespected by his students and family alike, finds out he has cancer. This man, who’s doing his best to provide for his family, has a huge problem. He’s broke.
It’s early morning. 6:00am. Walter White, gets up and walks into a room decorated for a young child. He uses a step machine, (the kind you buy on Cable TV) and stares out of the window. The camera pans around and shows, just for a brief second, a certificate on the wall. Your eye catches “awarded to Walter White” and “Nobel Prize.”
You’re asking yourself, why is this guy, a mild-mannered teacher, living in a small three bedroom house in Albuquerque if he’s anything to do with a Nobel prize? And what is he doing there? The scene is full of symbols, showing you he’s broke, but not telling you his situation. Hook, hook, hook.
Loewenstein’s research discovered a link between a gap in your knowledge and curiosity. You might be thinking that’s obvious, but human beings are hard-wired to close a curiosity gap that’s been opened.
This is one reason Netflix has been so successful. Want to watch an entire season of a new show? Sure. No problem.
In July 2013, Netflix shares could be bought for $53.06 (split adjusted), but by June 2018 the same share of Netflix cost $2,962.47. That’s an increase of 5,483%.
In 2013, while the analysts were on financial TV telling the public the reason not to purchase Netflix shares, because of viewing figures, competition, and debt, if you’d have been paying attention and understood gap theory, you might have realised the analysts were missing something.
(RE: Netflix — This is not financial advice, and should not be taken in any way as a recommendation of Netflix as an investment.)
When faced with uncertainty, human beings have a tendency to search for the opinions of others, and in precisely the same way, when we open a curiosity gap, it’s known that we experience a strong need or desire to close the gap. Just like the uncertainty pattern, the curiosity gap pattern has been used to manipulate the crowd into action.
You might be thinking that exploiting the crowd using these tactics is a new phenomenon? It’s not.
In 1951, America was booming. America, emerging from victory in WWII, was enjoying, thanks to the Bretton Woods agreement, the advantages of the US dollar being the world's reserve currency. The US dollar was backed by and redeemable into gold at a set rate, and the other world currencies floated against the US dollar. This gave the US a huge advantage, and it's because of the favourable conditions Americans started to spend, and spend and spend.
It was the birth of modern consumerism. American consumerism also brought with it another industry. Advertising.
The birthplace of modern advertising is Madison Avenue in New York City. Home of the Mad Men. But one man stood out among his peers, and his name was David Ogilvy. Ogilvy realised the power of uncertainty and gap theory and used this to maximum advantage to help launch his business and develop it into one of the most successful advertising agencies in history.
In 1951, the owner of an unknown shirt manufacturing company walked into Ogilvy's office and asked for help. The problem was, he didn't have any money. Ogilvy said he couldn't help, but the shirt company owner made Ogilvy a spur of the moment deal. Ogilvy would have complete control over the advertising and was given creative licence to promote the shirts anyway he wanted. Ogilvy said yes.
Ogilvy hired a silver-haired actor to appear in the advertisements, but having an understanding of gap theory, he knew something was missing.
Ogilvy disappeared from the set and came back half an hour later with an eye patch.
Ogilvy's advert first ran in the New Yorker Magazine on the 22nd of September 1951. The advert was one of the most successful in history. It ran not for a few months, but for decades.
And the reason it worked?
As soon as you see the eye patch, you're intrigued. (This opens a loop)
You want to know who the Hathaway man is?
Specifically: What happened to his eye?
The curiosity creates a desire.
...You want to be part of the Hathaway secret and the only way to do that short of cutting your own eye out
...is to buy a Hathaway shirt. (This closes the loop)
The only way to end the pain of having an open gap was to buy.
When the majority of people become uncertain and curious, they exhibit behaviour patterns that can be exploited.
If you search the internet for articles about cryptocurrencies, you’ll generally find two different types.
The first is the quote and comment article. Around 80% of articles on cryptocurrencies are of this type. They comment on the up and downs of the market as if it was a horserace. And it’s Bitcoin, Bitcoin up by 2%, followed by Ethereum, now Stellar, Stellar on the inside rail, two lengths, one, it’s neck and neck… You get the picture.
On up days the articles are bullish, backed up by bullish quotes from well know market gurus. On down days, the articles are bearish but are backed up, generally, by gurus that have deferred their bullishness until next year or sometimes longer.
Just this week an article appeared with bullish comments backed by an expert who had deferred Ethereum’s bullishness until 2020.
The second type of article is the deep dive into the technical rabbit hole. These articles may be of use if you’ve got the technical background or you’re a closet geek, but for the majority of people interested in cryptocurrencies, they are too demanding. Full of technical jargon and often overly complicated.
Is it possible to take part in a market trend with no or little knowledge of how the actual product or service that’s causing the trend works?
Between 1990 and 1995, the percentage of households with a personal computer was stable at around 16%. What was missing was the “killer app,” the app for everyone. Early on, the drivers of home computer usage were the spreadsheet, word processor, desktop publishing, and games. But in 1993, home computers got the killer app. The Mosaic Browser. From late 1993 a new device was being purchased by the public. The modem. And a new word was being used for the first time. The world wide web.
This was the catalyst. Between 1995 and the end of 1996, the percentage of households with a personal computer doubled. Between 1997 and 2000 it doubled again. Then came broadband, then social media, and then smartphones.
Fortunes were made by those who recognised the environment was right for the boom in home computers. The point is this: To be successful it wasn’t necessary to understand how computers worked, only that the conditions most likely to cause a change of behaviour were in place.
Imagine sitting in a meeting, in 1994, with the owners of a very well known (and successful) software company. Would you be surprised to observe the CEO (and most of the other top-tier executives in the room), had next to zero knowledge of how a computer worked?
Yet, they were all experts in business and understood the timing of their investments was more likely to succeed because of the background business conditions and the (potential) catalyst — the internet and the web browser.
Of course, having the technical background to understand the nuances of blockchains is an advantage, but like the investors in personal computers in 1994, not necessary, if you have an understanding of background conditions that could be favourable to your investments.
A weather forecast announces a 30% chance of rain tomorrow. But what does this actually mean?
Some people believe it means it will rain tomorrow 30% of the time, and some believe it will rain in 30% of the forecasted region. Others think it means 70% of weather forecasters believe it won’t rain tomorrow, while 30% think it will, and some think it means that it will rain on 30% of the days for which the announcement is made.
But who is right? To the forecaster it’s obvious, but not so for the rest of us.
When you read articles on complex subjects like blockchains, you’ll find plenty that are confusing, just like the 30% chance of rain weather forecast, not because the writer does not know his stuff, but because, to the writer, what he’s explaining is obvious, and a great deal of the time, for the reader trying to make connections and understand the subject, it isn’t.
Nobody knows what is going to happen in the future with 100% certainty. When you read someone's opinion, that’s all it is. Opinion. The problem is connected to Sylvan Goldman’s story and his shopping cart. The higher the level of social proof that’s associated with the person who is giving an opinion, the more likely it is to be believed and acted on. Human beings are imitation machines. If they don’t know, they will listen to the opinion of the someone who can demonstrate they are an expert.
Social proof is used with many other sneaky tactics to elicit some kind of response from the person, reading, watching, or listening.
Some people make investing and speculating in cryptocurrencies more complicated than it need be by thinking they will gain an edge learning how blockchains work.
It’s challenging to find value this way because with cryptocurrencies it’s difficult to find a metric that allows a comparison to be made. For example, if you’re evaluating a company’s share price, you can compare the price you’re paying today for the cash flow of tomorrow — but what metric can you use to compare one blockchain’s advantage over another?
Beginners in cryptocurrency speculation start with using technical analysis because it’s the easiest tool to use. They are like poker players who think the game is won by the value of a hand. It’s not.
Poker is a game that has a lot in common with speculating and investing. A large percentage of beginning poker players learn what hands are more valuable and make the mistake of only playing the high-value hands and folding the rest. This is called playing tight. Or they play loose and will play almost any hand. Elite poker players understand that poker is a math problem. It’s not about hand rank. It’s about player frequencies. An elite poker player can place their opponents on a range of hands very quickly, and they can do this accurately enough to win consistently.
Technical analysis is a useful tool, when timing entries, but is not much use in evaluating background market conditions.
An increasing number of professional money management businesses now use investor psychology quantitatively as a tool to evaluate probability.
The success of Netflix is an example of this. You could compare the metrics of the company, things like sales, profit margins, and debt, but you could also have formed an idea of the likelihood of Netflix being successful because of human nature.
Coded into us is the need to close an open loop. David Ogilvy used an eye patch to create one of the most successful advertisements of all time. If you think of Netflix as a machine, capable, on an industrial scale, of creating open loops — loops that have to be closed, then you would have some valuable insight to measure against the usual articles and financial guru opinions when Netflix lost 82.59% after it hit its (then) all-time high in July 2011.
And so it is with cryptocurrencies. They are also down over 80% from their all-time highs. The 5% spend their time analysing background conditions, while the majority, use technical analysis and someone else’s opinion.