10 psychological tricks our mind plays on us as investors

What is standing between you and property investing success? It could be you!

Maybe you’re too biased to be a successful property investor?

What do I mean by that?

Well, did you know 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.

That’s because we’re subject to cognitive biases — the way our brains sneakily convince us to make decisions that aren’t always in our best interests.

Cognitive biases may convince us to spend more, save less, and feel more confident in our decisions than perhaps we should. And the scary thing is, for the most part, we’re powerless against them.

Today – in the first of a two-part series – I’m going to look at some of the most common ones.

1. Confirmation bias

People tend to search for information that confirms their view of the world and ignores what doesn’t fit.

In an uncertain world, we love to be right because it helps us make sense of things.

We do this automatically, usually without realising; partly because it’s easier to see where new pieces fit into the picture puzzle we are working on, rather than imagining a new picture.

For example, if we believe that a particular type of property or a specific region will make for good investing, then we tend to only seek out news and information that supports that position.

Confirmation bias also prevents us from looking objectively at an investment we’ve already made. Once we’ve bought a property, we look for information to confirm that we’ve made a good investment, while at the same time ignoring information that may indicate the investment may be a questionable one.

Investor takeaway

One way to counter confirmation bias is to read things you’re going to disagree with. In other words, read all you can from reputable sources, whether it’s confirming your original view or not.

Another is to look for reasons your strategies could be wrong, rather than right.

2. Anchoring bias

We have a tendency to use anchors or reference points to make decisions and evaluations, and sometimes these lead us astray.

Anchoring explains why you’ll pay $6 for an hour of parking after seeing $10 at a car park down the street. The first number you see, especially when it’s a price that comes up in negotiation, colours any that come after it.

A high anchor influences you to spend more than you normally would.

Property marketers, estate agents and car salespeople use this principle all the time.

They start with a high asking price and then you feel good when you extract a discount from them.

This is because the initial price you set for a house or car or more abstractly, for a deal of any kind, tends to have ramifications right through the process of coming to an agreement. Whether we like it or not, our minds keep referring back to that initial number.

Investor takeaway

As you can see, it’s natural for our brain to select an anchor as a shortcut around which it makes decisions.

It’s important for you to evaluate any property deal based on its own fundamentals and all the information you have available form your research and due diligence at the time.

3. Awareness bias

How are your investments performing – are you happy with the results you’re getting?

There’s a chance that even if they’re not doing so well, you may not even recognise it.

In fact, it’s been shown the poorest performers in all arenas of life are the least aware of their own incompetence.

Lacking the capacity to realise how badly a task is performing is known as the Dunning-Kruger effect.

Investor takeaway

If you’re the smartest person on your team, you’re in trouble.

It’s best to work with mentors and professional advisers.

As with any financial investment, a property investor should consider getting independent property strategists to not only help you formulate a proven property strategy, but also to help you annually review your property portfolio objectively.

4. Positivity bias

Many people view residential real estate positively, considering it an asset class through which they can grow their wealth – and they continue to view it in this light, even if their investments fail to prosper.

In the face of lack of capital growth, prolonged vacancies or inflated expenses, they still continue to believe their investment will turn the corner “one day.”

The problem with this is that when all signs point to a dud investment, it likely is one – but positivity bias can stand in the way of an investor taking action to rectify the situation.

Investor takeaway

Overconfidence is a real risk for property investors – one of the best things an investor can do is admit what they don’t know and get a good team of professionals around them.

5. Negativity bias

Just as some investors can be overly positive, there is also the tendency to put more emphasis on negative experiences rather than positive ones. People with this bias feel that ‘bad is stronger than good’ and will perceive threats more than opportunities in a given situation.

Psychologists argue it’s an evolutionary adaptation – it’s better to mistake a rock for a bear than a bear for a rock.

To keep our ancestors alive, Mother Nature evolved a brain that routinely tricked them into making three mistakes: overestimating threats, underestimating opportunities, and underestimating resources (for dealing with threats and fulfilling opportunities). This is a great way to pass on genes, but a lousy way to promote quality of life or grow your wealth through property.

Investor takeaway

Fact is: there will always be property pessimists around telling us why not to invest and reminding you of all the things that can go wrong, and the reality of real estate is that it is a cyclical investment class.

However, you can minimise your risks and maximise your upside if you educate yourself and become financial fluent, follow a proven strategy and get the right advice.

6. Status quo bias

This describes our tendency to stick with what we know, whether or not it’s the best course of action. It could be as simple as buying the same name-brand groceries that 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 to do nothing.

Investor takeaway

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.

That’s why all the successful investors, business people and entrepreneurs I know have mentors, coaches and mastermind groups to help them see their blind spots and to encourage them to keep moving forward.

7. Survivorship bias

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.

You see, 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.

Investor takeaway

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.

The trick when looking for advice is to not only learn what to do, but also look for what not to do.

8. Bandwagon bias

This is the psychological phenomenon whereby people do something primarily because other people are doing it.

This tendency of people to align their beliefs and behaviours with those of a group is also called “herd mentality.”

Herding is the phenomenon by which animals and humans herd or stick together as a mechanism to enhance our safety.

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 leads to asset bubbles.

But when it comes to financial matters we know “the herd” is usually wrong – most property investors never build a substantial portfolio.

I’ve seen numerous investment fads and fashions come and go (USA property investing; New Zealand property; time share; mining towns; vendor finance; hot spots etc, etc) and I’ve seen many investors caught up in the hype with the mistaken belief that if others are doing it, it must be a good investment.

But as it turned out, the herd was wrong.

Investor takeaway

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.

I’ve found “ the herd is usually wrong” or if not they’re late.

Unfortunately, excellence is the exception rather than the rule and that’s why I believe you should aspire to be unique and not part of the herd.

As Warren Buffett said: “Be fearful when others are greedy and be greedy when others are fearful.”

9. Restraint bias

Following on from bandwagon bias, restraint bias is the tendency for people to overestimate their ability to control impulsive behavior.

Will you have that extra chocolate when you’re watching your weight?

Will you spend that extra hour on the internet when you have more 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 are most restrained are also most likely to be impulsive.

I’ve seen property investors plan to hold on 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.

Investor takeaway

Having an independent voice, an adviser, can help to curtail impulsive behaviour when it comes to investing. This is another reason why it’s best to work with mentors and professional advisers.

10. Bias bias

Failing to recognise your cognitive biases is a bias in 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.

Investor takeaway

The reality is that everyone comes into investing with their own predispositions and we are all prone to errors in judgment. The sooner you realise and acknowledge these tendencies in yourself, the more open you will be to improving and making better investment decisions.

Simply becoming aware of these biases means half your battle against your own worst enemy ­– yourself – is won.

The bottom line

We all want to think we are rational and biases are things that afflict other people.  However, the human brain is designed with blind spots and one of its clever tricks is to confer on us the comforting delusion that we, personally, do not have any biases.

This is why so many of us are not only bad with money, but make the same mistakes over and over again. We’re blind to our blindness.

I’ll share 14 more cognitive biases with you next week.

Michael Yardney is a director of Metropole Property Strategists who create wealth for their clients through independent, unbiased property advice and advocacy.