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The Psychology of Decimals

by

         The Psychology of Decimals

With all the excitement of recent events it is easy to forget that the ecosystem around Bitcoin is still very young. The technology is less developed than our interest in it. This will change over time. In the interim, adoption is challenging.

Software is routinely beta and layers are nascent. For the uninitiated Bitcoin can seem daunting and full of technical jargon. Among the most challenging intellectual leaps involves the decimal.

Each Bitcoin is divisible to 8 decimal places (100,000,000 individual units). The fiat currency we have always known is divisible to only 2 decimal places. This represents a huge paradigm shift.

So Bitcoin is more perfectly divisible than any of its fiat monetary competitors. Theoretically, this is is a source of strength. However, there is a vast gap between theory and reality. For adoption: perception is reality. Perception is king.

In a recent interview, IBM executive Richard Brown made an interesting statement. He noted that, as an alt-coin example, Litecoin was “testing the idea that psychology matters.”

Litecoin’s main differences are well known. Among these, the total number (nominal units) that will ever exist is 84 million, compared to Bitcoin’s 21 million. Richard sees litecoin as testing the idea that “if we have a larger nominal number of currency units, does that change people’s behaviour?”

This question has far reaching implications for adoption. At its heart lay the decimal place and the psychological impact of nominal representations of wealth.

Litecoin to Bitcoin – A Numbers Game.

Theoretically Bitcoin does not need any clones. With 21 million nominal units, divisible to 8 decimal places, it is more than capable of supporting a global economy. Nevertheless, Bitcoin is an open-source project. So, for better or worse, it has a potentially infinite number of copies.

In a marketing sense Litecoin has sought to define itself as the ‘silver’ to Bitcoin’s ‘gold’. However, neither exists physically. So, network effects aside, they are interchangeable for a given user.

A Game of Numbers – Perception Rules.

Numbers, psychology and value all interact inside our minds. Research on pricing psychology suggests that numbers and their arrangement around the decimal place influence perceived value.

As the eyes move left to right, digits to the left of the decimal place are most significant for us. We have learnt to see these numbers as important. We have learnt to overlook anything laying to the right. This leads to an overall rounding-down effect in one’s mind. The exception being ‘special offer’ situations, with numbers to the right of the decimal ending in seven or nine.

As Bitcoin increases in value, wealth representation necessarily moves to the right. An average weekly wage, for example, would now show a ‘0’ digit to the left of the decimal place if represented in Bitcoins on current highs. If price creates expectancy then a ‘0’ to the left is a big disappointment.

Our perception of a given thing creates a price point: the point at which demand changes. Marketing research applied to this case suggests that perhaps Bitcoin’s demand could be affected as units to the left increasingly comprise of zeros: an inevitable consequence of increasing valuations.

Perhaps then, a user will irrationally tend towards participation in a network that denominates their worth with a bigger number. A user may tend towards the use of Litecoins, for example, out of a desire to own whole units. This would give the user a larger nominal representation of wealth, fewer zeros to the left and a greater psychological satisfaction.

Scientist and researcher Stanislas Dehaene notes that prices with precise numbers tend to make consumers uneasy. Prices are rounded to calm consumers and increase perceived value. Dehaene also notes that Rounded numbers convey value.

A Bitcoin is only a mathematical construct. So as a representation of value it is incredibly precise. Allowing for protocol changes it has the potential to be even more precise. Bitcoins are anything but rounded. For the inexperienced this precision must be intimidating.

Unless you hold the opinion that Bitcoin, purely disruptive, will sell itself, then it still faces significant challenges: its continued adoption not yet assured. People who have never given much thought to money, value transfer or distributed consensus are unlikely to immediately realise the implications of Bitcoin. Already software is aiming to work around such issues.

Some Practical Approaches

Phone apps like Bridgewalker aim to use Bitcoin as a ‘behind-the-scenes’ transfer tool, keeping balances denominated in fiat in the user interface. The Multibit and Electrum wallets show fiat denominations next to BTC balances.

There is also a trend towards denominating bitcoins in mBTC and uBTC. Still, handing over so much fiat to own a just small fraction of a purely digital unit is a challenging psychological barrier to breach. Especially given our current preconceptions as to money and value.

It may be the case that the Bitcoin network does not find its eventual long-term success as ‘money’ or ‘currency’ at all. Richard Brown believes that “Bitcoin’s true significance lies in its potential as a global digital asset register”. This is just another potentially revolutionary and disruptive use case. For Bitcoin, there are many.

The technological quantum leap here is not necessarily a new type of money. Rather, it is the ability to now achieve global consensus over a decentralized and distributed network without a trusted third party. This has many potential applications for various fields of endeavour.

But for now the focus is on the Bitcoin network as a payment system and the Bitcoins as money. Focus will remain on this application for the foreseeable future. If the network is to continue its growth then, for the moment, people need to be satisfied with the idea of Bitcoins as money.

Emotion affects decision-making. Those working on the tools to aid Bitcoin ease-of-use and adoption must understand this. Emotion will affect an individual’s decision to participate in the network. This same principle applies to an individual’s view of these strange new units of account called ‘Bitcoins’ and the price they will pay for them.

The more creative ways we can find to deal with such esoteric nuances, the better. Bitcoin, after all, is full of them. In developing strategies it is important to be clear about the audience and their limitations in stepping outside their current understanding of ‘money’. Bitcoin will then remain awe-inspiring but cease to be baffling.

(Note: Tweet me if you want/need sourcing).

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