A team of academic researchers from the U.S. recently published a study exploring how the “gambler’s fallacy” affected cryptocurrency donations. Their findings indicate that organizations accepting crypto donations could benefit from timing the market.
Essentially, the team’s work explores the idea that people generally misinterpret certain pattern signals when it comes to finance. Charities that understand the penchant for crypto holders to hold or move assets based on perceived market conditions may be able to optimize their strategies to reap larger donations.
Per the paper:
“Our findings support actionable recommendations for how charities can design more intentional fundraising campaigns to take advantage of the cost and time efficiencies of cryptocurrencies. By considering recent changes in cryptocurrency prices and highlighting the urgency to donate, charities can design more effective strategies to engage cryptocurrency donors.”
The team tested their premise through an empirical study of cryptocurrency donations to 117 campaigns at an online crowdfunding platform. They also conducted a controlled online experiment studying features of cryptocurrency donation context.
After careful analysis, the team determined that market movement was directly correlated to donation “activation” (first time donations) and donation sizes.
According to the paper, the online experiment expanded on the empirical analysis and demonstrated that “donors’ decisions are affected by recent changes in asset price, consistent with the gambler’s fallacy heuristic.”
The gambler’s fallacy, also commonly called the Monte Carlo fallacy, refers to the tendency for people to misinterpret statistically meaningless historical events, such as the flip of a coin, as a predictor for future odds.
As an example of the gambler’s fallacy, if a person flips a coin 10,000 times in a row, and it lands on heads each time, an observer might think that the next coinflip has a higher chance of landing on tails because, as the above video explains, “it’s due.”
In reality, the odds of a coin landing on heads or tails is always exactly one-in-two with no regard for historical outcomes.
During the study, the researchers determined that participants are more likely to be activated to donate after experiencing declines in asset value. This purportedly occurs because donors feel more confident that prices will go up after their donation due to the gambler’s fallacy. “Moreover,” the paper continues, “we observe that participants’ reliance on the gambler’s fallacy is amplified when they face urgent donation appeals.”
Ultimately, the paper concludes that these insights could be used as empirical evidence in the decision-making process for organizations and individuals managing charities that accept cryptocurrency donations.
Related: Blockchain in charity, explained