If you are on crypto social media, you are bound to see posts every day warning against shills like Bitboy, the biggest crypto YouTuber who is widely accused of pumping various shitcoins by shilling their 100x potential to his followers, and then dumping his bags on them. (Honestly Bitoldman would be a better name?? but I digress.) Yet many shills have huge followings while the non-shill-y edifying content creators have much smaller followings, which leads us to the question of why people are prone to shilling. This same question applies more broadly - why do a long line of people fall for joining MLMs or paying thousands for scammy get-rich-quick courses when a quick search will yield plenty of warnings to the contrary? In some cases, it is simply being a newbie and lacking the knowledge. But in many cases even after people have been warned off of shills or schemes, they actually dismiss the warnings. What psychological forces are at work that lead us to fall for shills and similar scams?
What are cognitive biases?
Classical economists assumed that people are rationally self-interested and would always make rational decisions to pursue their interests. It doesn't take much observation of the world to see that that is poor assumption, whether it is people who choose to incur massive student debt to go to a school where few people get jobs to people who vote against their own self interests. Behavioral economists challenged that assumption and began to document cognitive biases, which are systematic irrationalities in judgment and decision-making that impact people generally and lead them to make suboptimal judgments and decisions. (If you're wondering why these cognitive biases exist, the answer is evolutionary psychology. These cognitive biases are short cuts or heuristics that allow us to make quick decisions. In some cases, they are ego-driven, which also relates back to evolutionary psychology because ego-protection staves off negative emotions.) I think the answer of why people persist in listening to shills and falling for scammy schemes lies in these cognitive biases and other psychological phenomenon. As I was writing this I realize there are actually so many cognitive biases at play that I will have to split this into two articles.
How do cognitive biases predispose people to fall for shills?
The first step is to form even a small belief in the possibility that whatever the shill is shilling might be true. Once we have that small belief, that is the fertile ground that allows the other cognitive biases to take hold. Imagine that you're new to crypto and go searching for more information on
Once you begin to form that belief, a cascade of cognitive biases can lead to a firmly-held belief in a shill or scammy product or venture. Have you ever tried to talk someone out of something you can clearly see is a ripoff? If so, you have encountered the power of the desire to believe and cognitive biases at work. Of course different people are more and less prone to being impacted by cognitive biases, but you are foolish if you believe that you are above being effected by them. In fact, people who hold that belief tend to actually be more impacted by cognitive biases (as do smart people - they trust their own irrational reasoning more). You may not fall for shills but you have definitely fallen prey to cognitive biases. We all have.
1. Confirmation bias causes people to seek evidence to support their beliefs and not seek, and minimize, evidence contrary to their beliefs.
First, people are irrationally prone to seeing what they want to see (and, on the flip side, dismissing or explaining away what they don't want to see). We've probably all observed this - it is much easier to see in other people than in ourselves - but researchers have also documented it and given it a name: confirmation bias, i.e., seeking and giving weight to evidence in support of our beliefs and not seeking, and minimizing, evidence that contradicts our beliefs. Once we have even hope that a shill might be telling us about a real opportunity, we start seeking evidence that supports that theory. It is not something that we are generally conscious of, but the next time you find yourself considering an investment opportunity, it might be a good time to ask yourself whether you are equally seeking and evaluating evidence for and against making that investment.
For example, if you are considering investing in a franchise, you will receive what is called a franchise disclosure document ("FDD") containing certain information the franchisor is required by law to disclose to you, kind of like the offering document accompanying securities investments. Among the materials in the FDD is a list of people (including contact information) who have closed or sold locations of that franchise within the past five years. It would be wise to call these people and ask about their experiences and why they closed. I have done this myself (I ultimately chose not to franchise as further chronicled in this post about franchising versus independent business), and every person I called had never been contacted before even though hundreds of franchises had been sold after they closed. It was even more shocking when the franchisor told us that the vast majority of franchisees asked no questions about the information in the FDD. The franchisor was shocked at the number of questions we were asking. Even we felt the impact of confirmation bias while we considered franchising - we wanted to explain away why so many locations of the franchise were performing poorly. The revenue numbers were right there in black and white (as required to be in the FDD) and they were quite bad and yet we still were considering investing in the franchise. I am talking about franchises but the same thing applies to shilled cryptocurrencies, MLMs, etc. We all want to believe that if we invest in Cardano, it will go up by 1000% and it will make us millionaires. It feels good. With crypto, it isn't just one shill either. It is often many shills which just adds to the weight of the "evidence" they are providing.
2. Overconfidence bias, our tendency to believe that we are the exception to the rule and overestimate our capabilities and underestimate the capabilities of others, leads us to dismiss contrary evidence from others.
People are generally overconfident. This is etiology of the phenomenon of approximately 95% of people believing they are above average drivers or 80% of people believing they are above average in intelligence (which, in a normally distributed trait, is not possible). Strangely, the less experienced or skilled you are, the more likely you are to overestimate your own capabilities and, conversely, experts overestimate their skills much less since they have a much better handle on what they do and don't know. This is called the Dunning-Krueger effect. People often claim they don't experience this bias but let me ask you to think back to when you started college. Were you expecting to be in the bottom half of the class? Very few people do and yet college does a pretty good job of grouping kids of fairly similar abilities together so how do you really confidently know your performance especially given that your competitors are of similar intelligence and work ethic? Or ask yourself whether you believe you are an above average driver or of above average intelligence? It is likely if you are honest with yourself that you have some overconfidence bias.
The problem with overconfidence is it contributes to people discounting the bad experiences of others and thinking that they are going to be the exception. Many times with crypto shilling the voices of dissenters are drowned our by all the people shilling their bags to unsuspecting newbies. But if you read most shill threads or the comments to shill videos, you will see people warning to not invest. But because of overconfidence bias, it is easy to be overconfident about your chances of success and to dismiss other people's failures as due to their poor capability as to investing (yes, even as to the same investment). If you are motivated to do so, it is easy to explain away the poor outcomes of others and think of reasons why you will still be successful.
3. People's tendency to avoid cognitive dissonance leads them to rationalize or explain away contradictory evidence.
Cognitive dissonance is the mental discomfort that results from holding two conflicting beliefs at the same time. If people have already begun to want to believe a shill, and confirmation bias and overconfidence have led them to seek supporting evidence and dismiss conflicting evidence, that belief will begin to take hold within them and become associated with their ego. (Yes beliefs become associated with our egos - just think of arguments you have had with people where you clearly have the rationally better side but they stubbornly cling onto their beliefs anyway - or vice versa. That is ego-associated beliefs at work.) Once a belief has been planted in the fertile ground of our minds, and fertilized by association with our ego, being confronted with conflicting information or beliefs results in uncomfortable cognitive dissonance, especially if we have already taken the action of investing in whatever was shilled to us. When people experience cognitive dissonance, they are psychologically motivated to resolve the dissonance and rid themselves of that discomfort. Generally people resolve this discomfort but doubling down on their ego-associated belief and minimizing, rationalizing, or explaining away the ego-deflating belief or evidence. For people who have already ego-associated themselves with whatever idea a shill is pushing, this means that when they encounter evidence or information contrary to that belief and experience cognitive dissonance, they are prone to rationalize or explain away that contrary information to rid themselves of that uncomfortable cognitive dissonance.
How do you avoid falling for shills?
The psychological phenomenon laid out in this article explain why people are prone to falling for shills and other similar sketchy "opportunities", but there are actually several more cognitive biases that further predispose us to shilling which I will plan to address in a second installment since this article is already quite long. The last thing I would like to quickly address is how to limit the chance that shills will convince you from investing in a useless token. Here are a few recommendations:
- Stick to the cryptocurrency investment strategy suggested at the end of that article - if you follow it, there is little possibility of investing in a crappy shilled token since the strategy is very specific about which tokens to buy.
- Make friends in the cryptocurrency community. Join the discords and forums of solid protocols like Yearn Finance and Curve Finance and make friends in the crypto community. Consult with your friends before diving in to exotic tokens.
- If it sounds too good to be true, it probably is (although to be fair there is a lot of opportunity in crypto right now that sounds too good to be true but is actually true).
About the Author: Harvard grad and former corporate lawyer is passionate about Ethereum and DeFi and has been investing in and using crypto for many years. She was inspired to write this blog covering the basics of DeFi, liquidity mining, farming, and tips and tricks and mistakes to avoid for DeFi newbies, as well as other Ethereum-related topics, to increase the number of people using ETH and DeFi by making it more accessible.
