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What is a grey rhino?
A “gray rhino” is a highly probable, highly impactful yet neglected threat: akin to both the elephant in the room and the improbable and unforeseeable black swan. Gray rhinos are not random surprises but occur after a series of warnings and visible evidence. The bursting of the housing bubble in 2008, the devastating aftermath of Hurricane Katrina among other natural disasters, new digital technologies that disrupted the media world, and the fall of the Soviet Union, these unfortunate events were evident well in advance.
Unlike the improbable and unpredictable “black swans” that captured the imagination of the business and financial world, a gray rhino is a highly probable threat that, like its relative the elephant in the room, has not gotten the attention it deserves. Gray rhinos are predicted well in advance and often avoidable if we act in time. It is also the most opportune timing to earn supernormal profits.
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Normal economics assumes that people are purely rational, selfish, with complete information. However, behavioral economics combines theories of behavior analyses and psychology to make adjustments, giving room to human error and thus forming the basis of today’s economic models.
Behavioral economics have dramatic influence on modern financial theories. It explains that people make judgements without complete rationality, especially in financial markets. In the view of behavioral economists, investors sell profitable stocks with prices still rising, and hold losing stocks with prices continuously going down, both are examples of irrational behavior.
Because of this expected and imminent irrationality, opportunities to make profits are created from the gray rhino. When Bitcoin fell from a historical high of $20,000 to $6,000 and crashed, the cryptocurrency industry became filled with pessimism. Investors chose to ignore every positive signal and thus missed the opportunity to profit when the price of Bitcoin rose to $8,000. In terms of trading, independent thinking is the only solution to the gray rhino. We should always remain calm and observe patiently, focusing and thinking clearly majority of the time.