Avoiding the Face Value Effect in Cryptocurrency

Abstract

As cryptocurrency is increasingly adopted, regulators must consider whether regulations are needed to protect investors and consumers. In prior research involving a behavioral experiment, we identified the existence of a face value effect when people use cryptocurrency in transactions. Just as prior researchers have found a face value effect when people use foreign cryptocurrency,
we found a face value effect with the use of cryptocurrency. People predictably anchor on the nominal amount indicated by the cryptocurrency and fail to accurately convert the amount into their home currency. This cognitive bias results in significant overspending when the cryptocurrency is stronger than the U.S. dollar (USD). This Article examined whether different interventions could reduce this cognitive bias. Based on the results of another behavioral experiment we conducted, we found two interventions did so. First, when prices for a transaction are displayed in both USD and cryptocurrency values, the face value effect and overspending were mitigated. Second, in situations involving bidding on an item with no fixed price, requiring people to write out their bid or payment in USD before bidding in cryptocurrency was even more effective in reducing the face value effect and overspending. Accordingly, we propose the adoption of (1) domestic currency pricing (DCP) for items sold in cryptocurrency that requires the corresponding USD amount to be included for any price in cryptocurrency; and (2) for bidding on items in cryptocurrency, a simple requirement for people to “type out the price” of their bid first in USD, or the “TOP price” for short. These interventions are modest, but they may help reduce unintended overspending due to the face value effect.