What’s standing between you and property investing success?
It could be you! In the last issue of API (and in the last Solid Newsletter), I introduced you to the concept that there are a number of biases that can significantly affect your investment decisions. These include some fairly common ones, such as being biased towards overwhelming negativity or positivity, which often becomes apparent when couples are investing and they realise they’re in opposite camps.
Status quo bias
This describes our tendency to stick with what we know, whether or not it’s the best course of action. It may be as simple as buying the same name-brand groceries as you always have or as complex as holding on to that underperforming property.
People do this partly because they want to avoid costs, even when it’s apparent that those costs will be offset by a larger gain, being the long-term growth of a better performing property. Psychologists call this “loss aversion” and it explains why so many Australians are willing to stick their money in a plain old bank account earning minimal interest. rather than taking the “perceived risk” of a property investment. Most investment decisions have an alternative – one being to maintain the status quo and do nothing. Psychologists have shown that most of us disproportionately stick with the status quo because “doing nothing is within the power of all men” as we often weigh the potential losses from switching from the status quo more heavily than the potential gains.
The misconception here is that you should focus on the successful if you wish to become successful. While the truth is that when failure becomes invisible, the difference between failure and success may also become invisible.
Yousee… if all you’re looking at are other people’s successes, you could be missing the most important lessons for getting ahead from those who got it wrong. If you spend your life only learning from “survivors”, buying books about successful people and reading property investment success stories, your knowledge of the world will be strongly biased and enormously incomplete. When looking for advice the trick is to not only learn what to do, but also look for what not to do.
This is the psychological phenomenon whereby people do something primarily because other people are doing it. The bandwagon effect has wide implications, but is commonly seen during strong property markets where the media stirs up a frenzy and it’s one of the factors that lead to asset bubbles.
The tendency for people to align their beliefs and behaviours with those of a group is also called “herd mentality”, but we know “the herd” is usually wrong – most property investors never build a substantial portfolio. It pays to remember that just because everyone else is doing it, that doesn’t mean you should follow the crowds. In fact, smart investors tend to invest counter-cyclically.
Following on from bandwagon bias, restraint bias is the tendency for people to overestimate their ability to control impulsive behaviour. Will you have that extra chocolate when you’re watching your weight0? Will you spend that extra hour on the internet when you have important things to do? Our lives are full of temptations and some of us are better at resisting them than others. Psychologists say the very people who think they’re most restrained are also most likely to be impulsive.
I’ve seen property investors plan to hold during the flat few years that occur every property cycle knowing real estate is a long-term investment. They might even have created a strategy or discussed a plan of attack to help guide their decisions under various circumstances. But, when the time arrives, panic kicks in… and they react just like so many others and sell up, often near the bottom just before the cycle turns.
Failing to recognise your cognitive biases is a bias itself. Arguably this is the most damaging bias, because having blind spots means you’re less likely to recognise any of these psychological influences in yourself.
When you think you’re more objective than you really are, you may be at risk of having “bias bias”. The reality is that everyone comes into investing with their own predispositions and we’re all prone to errors in judgement. The sooner you acknowledge these tendencies, the more open you’ll be to improving and making better investment decisions. Simply becoming aware of these biases means half of your battle against your own worst enemy – yourself – is won.
Michael Yardney, Australian Property Investor, January 2015.
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