Introduction
Meme coins thrive not on intrinsic utility but on the power of human psychology: FOMO, social proof, overconfidence, gamification, and tribal identity. Precisely such dynamics can take what began as a playful joke on the internet and briefly turn it into a multi-billion-dollar market.
From the perspective of behavioral economics, grasping the powerful mix of entertainment, community, dopamine-driven speculation, and narrative is essential to understand how meme coins beguile investors’ attention.
It would be Ptolemaic not to recognize meme coins as a social phenomenon with wide implications for how we, as humans, perceive value and opportunity.
In this post, we are going to discuss the intersection between meme coin culture and the study of behavioral economics to maybe shed some light on why meme coins are so powerful.
Humans as Economics Agents
Humans are economic agents, but they are caught in that interesting middle area between rational calculation and emotional impulse. Traditional models of economics once portrayed humans as “homo economicus”-perfectly logical actors who consistently optimize for their own self-interest. However, behavioral economics has made it clear that real-world decision-making is vulnerable to a set of biases and heuristics. But all too often, factors like risk aversion, social proof, and FOMO can override strict cost-benefit analyses and make markets exhibit patterns that at times run against purely rational expectations.
Humans are irreducibly social beings, whose decisions are tied up with group norms and cultural influences. The pursuit of status, belonging, or just having a good time can drive economic decisions as strongly as the pursuit of profit. This interplay of cognitive biases and social dynamics means that, while responsive to incentives, people reach decisions through prisms of emotions, mental shortcuts, and collective identities. For this reason, human beings as economic agents come to be truly comprehended when financial literacy blends with insight from psychology, sociology, and even cultural narratives.
Let’s illustrate this with a two-player exercise known as the “Dictator Game” or “Ultimatum.” One participant is randomly assigned the role of dictator and gains control over a pot of 10 coins. They choose how to split the coins between themselves and the other player. The second player then decides whether to accept or reject this allocation: acceptance means both players receive their share, while rejection results in both leaving empty-handed.
The illustration below shows 2 examples of the game. The first example, the dictator offers 1 coin to the second player and wants to keep 9. The second example, the dictator offers 5 and keeps 5 (more equitable).
If humans are rational, it could argued that player 2 will always accept any amount more than zero, it’s free money (aka free gain). However, what often happens in reality is that player 2 will reject such a low offer because of its perceived unfairness. Perhaps offers as low as the coins maybe be accepted.
The path where the dictator chooses to split the coins equally is called a Nash Equilibrium in Game-Theory. It is the “no regrets path”.
Meme Coins are Irrational
Now that we have established the limited rationality of humans, let’s discuss why meme coins are a soup of human irrationality ingredients mixed perfectly and applied to finance.
To be clear, this post is not meant to encourage or discourage investing in meme coins. In fact, it is part of a new paradigm of social investing.
Need to Belong, Digital Identity and Gamification
The digital age and the need to belong find a new way of manifestation, interrelating with the need to create and maintain an online identity.
Platforms and communities-be they memes, cryptocurrencies, or online gaming-offer a common purpose and identity that can be amazingly strong.
Other game-like mechanics, such as leaderboards, badges, and even streaks, further reinforce this dynamic by giving tangible markers of either status or achievement, thus making social participation rewarding and game-like in nature.
Meme coin communities are not just about memes; it is being part of a community with the same goal and recognized within that community.
Behavioural Insight: The ingroup-outgroup dynamic and emotional investment in a community can overpower traditional financial considerations. In other words, people remain “hodlers” to preserve their group identity — even as market conditions shift. From a financial perspective, this could be the very thing that creates enough price momentum to some meme coins.
Anchoring and Over-Confidence
When a meme coin first makes headlines, early successes or all-time-high prices can become anchors for valuation. Investors may then fixate on those high-water marks, believing the coin can-or should-always return to that level. This fosters overconfidence bias, where one dismisses downside risks.
Behavioural Insight: Once the mental anchor is set, be it by a high price for a token or by the viral status of a meme, it’s very hard to readjust expectations downward, hence mismatching perceived versus real value.
Cost of Entry vs. Utility
With the proliferation of token-generation platforms, it is rather easy to issue a new token with very minimal technical effort. As a result, there has been an explosion of “Dog-themed” or “Meme-inspired” coins. Low-cost entry incentivizes rapid launches, many of which rely purely on viral marketing rather than foundational development.
Behavioural Insight: when barriers to entry are low and potential reach is huge — the internet — you get a high volume of new attempts-memes or coins-competing for attention. Most of them will fail, but a tiny percent could “go viral” or rally significantly and spur more copycats.
“Sunk Cost” Effects
Investors, especially early buyers, might “double down” on a meme coin as prices rise-or even as they fall-because they are psychologically invested. They hang on too long, hoping to validate their original decision to invest.
Behavioural Insight: The more resources (time, money, effort) individuals put into something, the stronger the inertia to stick with it, regardless of whether that decision remains rational.
A Note On Financial Paradigms
The rise of social investing signals a shift that’s every bit as exciting as it is disruptive: a groundswell of people joining forces, unified not just by the pursuit of profit but by a sense of communal purpose and shared discovery.
This new financial paradigm is fueled by the raw power of collective human emotion: the joy of belonging to a tribe, the exhilarating promise of “moonshots,” and the very real fear of being left behind. It’s a tide impossible to completely tame through spreadsheets and traditional logic, as at the very core there lies an urge to connect, to rally, to make one’s voice heard in a vast and often impersonal marketplace.
It cuts deeper than numbers on a trading screen; it’s about rewriting rules, challenging gatekeepers, and forging this new currency of identity and community.
All this fusing of electric finance with social fabric may point, more than any one coin or any trend could, to a growing realization of our powers as co-creators and stakeholders in the economic stories of tomorrow.
References
- Baumeister, R. F., & Leary, M. R. (1995). The need to belong: Desire for interpersonal attachments as a fundamental human motivation. Psychological Bulletin, 117(3), 497–529. https://doi.org/10.1037/0033-2909.117.3.497
- Papacharissi, Z. (Ed.). (2010). A Networked Self: Identity, Community, and Culture on Social Network Sites (1st ed.). Routledge. https://doi.org/10.4324/9780203876527
- Shiller, R. J. (2019). Narrative Economics: How Stories Go Viral and Drive Major Economic Events. Princeton University Press. https://press.princeton.edu/books/hardcover/9780691182292/narrative-economics
- Ballis, Antonis and Verousis, Thanos. (2021). Behavioural Finance and Cryptocurrencies. SSRN. http://dx.doi.org/10.2139/ssrn.4119562
