24 Feb How our mind sabotages investment success
On today’s show Michael Yardney discusses that 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. It is the way our brains sneakily convince us to make decisions that aren’t always in our best interests.
Read the transcript here:
Kevin: I’m going to continue the series of Michael Yardney in the show today. Last week, we started talking about the psychology of success, and we went through a few biases, Michael, which really resonated with me quite remarkably. I’m looking forward to seeing what we have today.
Before we get into it again, just explain to us briefly what it’s about.
Michael: We tend to think we’re rational human beings, however what I shared with you last week was that some of us are prone to what psychologists call cognitive biases that make us think and act irrationally. It affects our investment decisions because of these biases. We discussed a couple last week, and let’s talk about a couple more today.
Kevin: Please do. Let’s start.
Michael: One of the things that we’ve often spoken about on this show is that one should actually review the performance of your property portfolio. There’s a bias psychologists talk about called awareness bias.
How are your property investments going? Are you happy with the results you’re getting? There’s a chance that even if you’re not doing so well, you may not even recognize it. In fact, it’s been shown that the poorest performers in all arenas of life tend to be the least aware of their own incompetence.
Psychologists put a lovely name to it and call it the Dunning-Kruger effect. It means that you lack the capacity to see how you’re performing yourself. I guess it’s one of the reasons you actually need an outside mentor or somebody to help you, isn’t it, Kevin?
Kevin: That’s what I was going to suggest to you. That is the obvious solution – to have someone who is brutally honest with you and can point those things out to you.
Michael: Exactly, because all of this is happening at an unconscious level, Kevin.
Another bias we tend to have is positivity bias. Many people view residential real estate positively. They think it’s a great asset class to grow their wealth, and they continue to do so even if their investments don’t do too well.
In face of lack of capital growth, I’ve seen investors still say, “It’s going to turn out one day.” The problem with this is that when all the signs point to a dud investment, it’s likely that it is one, but positivity bias stands in the way of an investor taking action to rectify the situation.
Kevin: It’s very dangerous, Michael.
Michael: It is, isn’t it? You’re actually losing your own money. Overconfidence is a real risk for property investors. One of the best things an investor can do is admit, “I was wrong. It didn’t work this time.”
Kevin: You know, with positivity bias, if you are reviewing your portfolio, it could be a gross waste of time if you’re not willing to accept that something is wrong.
Michael: That’s right, but we don’t realize that we’re all prone to little bits of this in various elements of our life, aren’t we, Kevin?
Kevin: What about the opposite? Negativity bias?
Michael: That happens too; you’re right, Kevin. Just as some investors are overly positive, there’s a tendency to put more emphasis on negative experiences in some people, rather than the positive.
People with this bias feel the bad is stronger than the good, and they perceive threats more than opportunities in a given situation. Psychologists actually argue that this is an evolutionary thing. It’s better to mistake a rock for a bear, than a bear for a rock, they would say.
To keep our ancestors alive Mother Nature evolved a brain that routinely tricked us into making three mistakes. It used to overestimate threats, it used to underestimate opportunities, and it underestimated our resources for dealing with threats and opportunities.
This is a great way to pass on genes and to be genetically strong and have a bigger, stronger population, but it’s a lousy way to promote the quality of life or grow your wealth.
Kevin: What’s the difference between being negative and being conservative?
Michael: The thing is that some people see the glass half full and others see the glass half empty. While the pessimists and optimists keep arguing about which way the market is going, the optimists are just going out and making money.
The fact is we’re always going to have pessimists around us telling us why not to invest and reminding you of all the things that can go wrong. But the reality is that real estate is a cyclical investment. You can minimize your risks and maximize your upside by educating yourself, becoming financially fluent, following a proven strategy, and getting a good team around you.
Kevin: Indeed, and what’s the bottom line?
Michael: We all want to think that we’re rational and these biases are things that afflict other people, however our brains are designed with blind spots that tend to trick us and delude us. That’s why so many of us are not only bad with money, but we tend to make the same mistakes over and over again.
We’re blind to our blindness, so we should at least be aware of it and work with other people who can see our blind spots. That’s what a mentor does, Kevin.
Kevin: Wonderful stuff. Thank you so much, Michael, for taking us through the psychology of success. Michael Yardney is from Metropole Property Strategists.
Michael: My pleasure, Kevin.