11 Mar Are property investors rational?
On today’s show Michael Yardney will examine some further ways our brains sneakily convince us to make decisions that aren’t always in our best interests.
Read the transcript here:
Kevin: Most of us think that we’re rational, but deep down, we’re not. That’s one of the lessons we’ve learned over the last few weeks talking to Michael Yardney about the psychology of success. You’ve taken us through a few of the biases, Michael, but we’re not really all that rational, are we?
Michael: No, Kevin, we’re not, but simply becoming aware of these biases means we’ve beaten half the battle against our own worst enemy, which happens to be ourselves.
Kevin: Yes. You’ve shared a few great biases with us, the confirmation bias and the bandwagon effect, as well.
Michael: Sure, so let’s talk about a couple of others this week. One of them is what I call the “ostrich effect.” When an ostrich is scared, the bird supposedly buries its head in the sand to stay ignorant of the approaching threat.
Now, the logic in this is “If I can’t see it, it doesn’t exist.” It may be right, but in fact, as ridiculous as it sounds considering other human beings do this, as well, we simply don’t have a neck long enough, obviously, to stick your head in the sand. But we do deliberately look away from our money problems.
Some investors avoid unpleasant information, such as reading negative financial news, checking on the performance of their properties, while many Australians just bury their heads in the sand about their future financial security, and they put off investing altogether, Kevin.
Kevin: You can actually block things out, though, can’t you?
Michael: Yes. Now, one would say that’s a protective mechanism, and it is, but it also doesn’t really protect you. It’s hiding in the sand, and it doesn’t help you move on.
Kevin: It would be hard to communicate with someone and try to convince them that they’ve actually got this ostrich effect because the first thing they’re going do is block it out.
Michael: You’re right, Kevin. That’s why we started this whole series by saying, “We are our own worst enemy.”
Kevin: Yes, we are indeed. Sometimes, Michael, we tend to overlook some opportunities in the past because we’re content with what we already have.
Michael: Kevin, I think that’s a good point. It’s a bit like if you own a good Windows computer instead of Apple one like you and I do, you’re more likely to downplay the faults of Windows and amplify the faults of Apple computers. It’s just like when you’re convinced an investment you’ve made is great just because you spent so much time, so much research, so much emotion selecting it.
In fact, you rationalize your past choices to protect your sense of self. Now, you may not necessarily be wrong, but it’s a bias you should be aware of in the future when reviewing the performance of your property portfolio.
Kevin: You talked about research there, but what about people who look for patterns in research and make themselves believe that that’s the path they should follow?
Michael: Kevin, psychologists call this the clustering effect. It’s a tendency to see patterns that happen in random events. This is particularly seen with gamblers. They’re desperately trying to beat the system by seeing a pattern in the roll of the dice or the roulette wheel. “I had four reds in a row. Now it must be black’s turn,” when in fact it’s a 50/50 chance next time.
We’re pattern machines and recognize people and things from the overall patterns rather than the full details. While this is very useful – it helps us get through life – it also means we can sometimes see patterns where there’s nothing, as you said, Kevin. This selective thinking can lead to wrong conclusions when faced with the multitude of mixed messages we’re currently getting in the property market, so it’s just something to be aware of.
Kevin: Indeed it is. I know we come across it quite often, too, and that is that people end up with closed minds, Michael. They don’t have an open mind; they’re not even willing to even learn or listen.
Michael: That’s right. One of the challenges is more with intelligent people, I’ve actually found, because intelligent people sometimes have difficulty remembering what it was like when they started. I see this particularly in property investment when I come across professionals who are successful in their own fields and believe that this can translate to success in the arena of real estate.
Highly intelligent people, I’ve found, have difficulty asking for help or taking advice, because they think they should be able to work it out themselves. They try to tweak and improve and fine-tune someone else’s property strategy, they interpret it with their own biases, and then they wonder why it doesn’t work.
On the other hand, I’ve found that many of the successful investors I’ve come across are, I’ll very politely say, dumb. They just find a strategy that works; it’s worked for their mentors, and they just follow it.
Kevin: What about the overconfident people, Michael?
Michael: That’s a challenge too, isn’t it? It is the downfall of many investors. In fact, one of the worst things that can happen to an investor is to get it right the first time when they buy a property. This has happened a bit in the last year or two, really, during boom conditions when somebody’s just bought something, and they think they’re smarter than they are.
This has occurred when beginning investors bought mining towns, and all of a sudden, the prices inflated, or they bought at the right time of the cycle. Unfortunately, though, many are now finding out that they weren’t as clever as they thought they were as the value of their properties keeps falling, especially in the mining towns and in regional areas where prices are deflating.
As you can see, a lot of these preconceptions influence your success as a property investor. They get you to interpret the information that’s coming to you incorrectly, and you end up making less-informed decisions, Kevin.
Kevin: There’s one that we haven’t touched on that we might pick up on next week, and that is the one of procrastination. I think this is probably one of the worst ones I’ve ever seen, Michael.
Michael: That’s very common, isn’t it? Let’s talk about next week.
Kevin: Michael Yardney from Metropole Property Strategists. Thanks, Michael.
Michael: My pleasure.