15 Feb Bias in successful property investing
In today’s show Michael Yardney asks the question – “Are you too biased to be a successful property investor?” What does that mean?
As property investors we can sometimes be our own worst enemy. It’s not because of the decisions we make, the opportunities we consider or the investments we miss out on, but rather, it’s due to the way we think.
Kevin: I have a real treat for you over the next few weeks. Michael Yardney is going to be joining me. We’ll be talking about the psychology of success – what are some of the things that hold us up? As we go through this, there might be a few aha moments for you – there were for me when we were looking at the notes that Michael gave me.
Good day, Michael.
Michael: Hi, Kevin.
Kevin: Good to be talking again, mate. Some of these things, we’re sometimes our own worst enemy, aren’t we?
Michael: Yes, we are. That’s one of the things that holds us back.
Kevin: Okay. Can we run through a few of the things that you’ve observed?
Michael: Sure, Kevin. It’s actually not because of the decisions we make, the opportunities we consider as investments, or what we miss out on. It’s actually just in what we think, how we think.
That’s because, as humans, we are subject to something psychologists call cognitive biases. That’s what I’d like to spend some time talking about in the series of four programs we’re going to do together.
Kevin, they’re fancy words for how our brains sneakily convince us to make decisions that aren’t necessarily in our best interest. These cognitive biases sometimes convince us to spend more, maybe to save less, to feel confident in our decisions – maybe more confident than we should be.
The scary thing, for the most part, though, is we’re powerless against them because they’re subconscious, they’re unconscious.
Kevin: Okay. All right. But sometimes having it explained to us makes us more aware of it?
Michael: Well, you have to, to start with. I’ve been able to study this because as I’ve been dealing with some very successful property investors – and also some who are not as successful – I’ve noticed that it’s the mindset, it’s the psychology, that is the biggest difference between those who outperform regularly in all areas of life and the average Australian.
One of the big ones I come across in property is something psychologists like calling “confirmation bias.” You see, people tend to search for information that confirms their views of the world, and then we get to ignore the bits that don’t fit in.
In an uncertain world, we love to be right, because it helps us make sense of things. But we do this automatically, usually without realizing, partly because it’s easier to see where these new pieces fit into a picture puzzle we’re currently working on rather than imagining a new picture.
Kevin: How do we counter that, Michael?
Michael: What it really means, I think, is that if you believe in investing in a certain region, what you’re going to keep doing is you’re going to keep reading about the stuff that suits you. You tend to seek out news that will confirm what you think, and you actually don’t pay attention to other things.
During the mining town area booms, everyone kept reading everything that could be said about that, just like you tend to about your football team or the political party you like, and you ignore the others.
You asked a really good question, Kevin: how do we counter this? I would be suggesting you do this by reading things you’re going to disagree with. It sounds counterintuitive, but I’d be looking for reasons why your strategies could be wrong rather than why you could be right. That’s one way to do it, Kevin.
Kevin: Certainly broadening your horizons really, isn’t it?
Michael: It is, isn’t it? That’s right.
Kevin: What’s another one, Michael?
Michael: Psychologists like to say that we’ve got something called anchoring bias. We have a tendency to use anchors or reference points to make decisions or evaluations – something that could sometimes lead us astray. Can I give you an example?
Michael: If you’re going to go car parking in the middle of town, you’ll pay $6 per hour happily if you’ve driven past a car park that actually says $10 per hour down the street. The first number we see, especially when it comes to prices about things, actually colors what comes after it.
This is used often in negotiation. It’s often used in negotiation with property. You’ll notice it with estate agents, as well. High anchors influence you to spend more than you normally would.
Kevin: We call it conditioning, actually.
Michael: It is in some ways, isn’t it? Property marketers, estate agents, car salespeople, they use this principle all the time, Kevin. They start with a high asking price, and you feel good when you suddenly extract a discount from them.
This is because the initial price set for that off-the-plan apartment is actually higher than they were ever going to expect anyway. But it makes you feel good. Whether you like the number or not, your mind is referring to that initial number, and you think, “Hey, I’ve done a good job.”
Kevin: It’s rationalizing it, isn’t it, to yourself?
Michael: It is. This is the way our mind plays tricks with us.
Kevin: Oh yes – obvious. All right, mate, we’re going to have to leave it there. We’ll come back with more of these in the weeks to come.
We’re talking about the psychology of success with Michael Yardney. Thanks, Michael.
Michael: My pleasure, Kevin.