The psychological drivers behind market cycles

When the market is rising, your brain releases dopamine; when the market experiences a big dump, the fear center is activated. This is not just a metaphor—psychology and neurobiology directly shape every stage of the market cycle.

Why Your Brain Always Makes Wrong Investment Decisions

The human brain is not rational when it comes to money. Warren Buffett once said a classic line: “The market is a tool that transfers money from the impatient to the patient.” This statement hits the nail on the head—what drives market fluctuations is fundamentally not the fundamentals, but human emotions.

Neuroscience tells us that our brain is dominated in financial decision-making by several key neural structures:

• Dopamine Pathway: When you see the price rise, your brain starts releasing dopamine, a neurotransmitter that makes you feel excited and satisfied. This is why people tend to heavily invest multiple times during a bull market.
• Amygdala: This brain structure governs the fear response. In a bear market, it triggers the “fight or flight” instinct, leading to panic selling.
• Mirror neurons: These neurons allow us to feel the emotions of others. When we see others making a lot of money, we can't help but want to follow suit.

The Crazy Logic of a Bull Market: From FOMO to Bubble Burst

In a bull market phase, almost everyone begins to be optimistic about the market. The three forces of optimism, greed, and FOMO (fear of missing out) act simultaneously, pushing prices to heights that are difficult to reach rationally.

Taking TRUMP coin as an example. This coin received significant attention upon its listing due to its correlation, with a 24-hour trading volume reaching 1.14 million USD. Subsequently, the price skyrocketed from a low point, attracting a large number of retail investors. What happened during this process?

Psychological Level:

• Social media is flooded with stories of making money, triggering people's FOMO mentality.
• The effect of political celebrities has increased the visibility and popularity of the cryptocurrency.
• Every price rise reinforces the belief of “I should buy in”

Neurobiological level:

• The dopamine pathway is continuously activated, forming a positive feedback loop.
• Mirror neurons make people tend to follow the behavior of the majority.
• These factors together gave rise to irrational optimism.

Final result? The price has deviated significantly from its actual value, creating a typical market bubble.

Another Madness of the Bear Market: From Denial to Panic Selling

When competitors like MELANIA coin emerge and market sentiment reverses, another side of psychology reveals itself.

According to the latest data, the current price of TRUMP coin is $5.04 (24-hour fall -0.84%), with a circulating market cap of $1.01 billion, while the price of MELANIA coin is $0.11 (24-hour fall -0.44%), with a circulating market cap of $5.908 million. What is hiding behind this volatility?

Psychological Shift:

• From optimism to denial: “Maybe it's just a short-term adjustment”
• From denial to fear: “I'm going to lose money”
• From fear to panic: “Must sell immediately”

Neurobiological Response:

• The amygdala has taken over the decision-making process, and the “fight or flight” instinct has been activated.
• Loss aversion makes the fall seem more painful than an equivalent rise.
• Cognitive dissonance leads some people to hold on, hoping for a rebound.

This is why there is a large amount of panic selling during bear markets. The multiple significant pullbacks of BTC in 2022 are a perfect embodiment of this psychological principle.

How Group Psychology Amplifies Market Volatility

Mirror neurons and the herd effect are amplifiers of market volatility.

When a person sees others making money, mirror neurons are activated, giving rise to the impulse of “I should do that too.” In the age of social media, this effect is amplified infinitely:

• A person posts screenshots of making money
• Ten people experienced FOMO after seeing it.
• A hundred people rush in to chase the high.
• Finally form collective irrational decision-making

Taking the explosive rise of meme coins (such as Dogecoin, Shiba Inu, TRUMP, and MELANIA) as an example, the value of these coins is completely driven by speculation and community sentiment, rather than fundamental support. It is precisely the effect of group psychology and mirror neurons that has pushed these coins to crazy heights.

Cognitive Bias: Making the Same Mistakes Again and Again

In addition to the aforementioned neural mechanisms, there are several cognitive biases that often lead traders to make incorrect decisions:

Loss Aversion: The pain of losing 100 dollars is much greater than the pleasure of earning 100 dollars. This leads people to be overly conservative or excessively aggressive when in loss.

Cognitive Dissonance: When your beliefs conflict with reality (for example, when a coin you are optimistic about keeps falling), you tend to deny reality and continue to hold on.

Availability bias: You tend to overvalue recent events. When you see a coin rise by 10 times, you assume all coins will rise by 10 times.

How to Optimize Your Trading Strategy Using Psychology

Understanding these psychological principles can help you make better decisions:

1. Identify Market Sentiment Cycles: Observe periods of excessive optimism and excessive pessimism, which often present the best trading opportunities.

2. Counter FOMO: Set clear entry and stop-loss rules, and do not be swayed by the voices on social media.

3. Rationally assess the fundamentals: meme coins may rise, but you need to understand what you're investing in, rather than blindly following the trend.

4. Diversify Risks: Mainstream currencies like BTC are relatively stable and should be the core of the investment portfolio.

5. Manage Emotions: Be aware that your brain will swing between fear and greed, and make plans in advance to cope with these emotions.

Summary

The core of market psychology is: greed drives bull markets, fear drives bear markets, and the herd effect amplifies these two emotions.

Understanding how neurobiology affects our decisions can help you avoid common traps, such as FOMO chasing highs, panic selling, cognitive dissonance, and blindly following trends. The next time you want to jump into a popular coin, ask yourself: Is this the result of rational analysis, or is my amygdala making the decision for me?