Are all those other property investors crazy?

Around 8.6 million Australians bought a lottery or scratchy ticket in the 12 months to June 2018.

Lottery TicketThat’s around 44.8% of our 18+ population.

Who is buying these tickets?

When you do the maths they must be crazy.

The odds of winning the major lottery like Powerball or Mega Millions are around 1 in 176,000,000.

Fact is: No one is crazy

They may be misinformed.

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They can have incomplete information.

They can be bad at maths.

They can be persuaded by clever marketing.

They can have no idea what they’re doing.

They can misjudge the consequences of their actions.

Boy can they misjudge the consequences of their actions!

But the decision to buy a scratchy, a lottery ticket, or an off the plan property or a house and land package or whatever – makes sense to them in that moment and ticks all the boxes they need to check.

Every decision everyone makes is rationalised in their head when they make it.

I’ve often written about how we’re not rational when making investment decisions – we’re subject to behavioural biases.

Behavioural BusinessI’ve been a student of behavioural finance for years trying to understand why investors keep making the mistakes they keep making, when the end results of their actions – they negative consequences of the decisions they make – seem so obvious to me.

I eventually  came to realise that the cornerstone of behavioural finance is that most people assume it’s a field whose documented flaws apply to other people, but not themselves.

Clearly it’s easier to recognize other people’s mistakes than our own.

That’s because we judge others based solely on their actions, but when judging ourselves we have an internal dialogue that rationalizes what others identify as bad decisions.

We rarely hear the internal justifications other people have for their mistakes, but we’re keenly aware of our own.

Virtually everyone reading my blogs and listening to my podcasts has above-average education income, assets and career advancement opportunities.

So it’s hard for many of us to intuitively grasp the subconscious reasoning of those in the lowest income quartile, who purchase the most lottery tickets.

Hope LotteryBut you can imagine it going something like this:

“I’m living  pay cheque to pay cheque and just can’t save. I can’t see my wage increasing any time soon.  I can’t afford nice vacations, a new car, health insurance, or to buy my own home,

Buying a lottery ticket is the only time in my life I can hold a tangible dream of getting the good stuff that you already have and take for granted. That’s why I buy more tickets than you do.”

You don’t have to agree with this reasoning.

They still made a bad financial decision.

But you can understand why they did it.

A lot of decisions are statistically wrong but intuitively right for the person making them.

So why did so many property investors buy off the plan properties when the odds of investment success with them are so poor?

The easy answer is: Because they were irrational and greedy.

And while that’s true most investors probably rationalized what they were doing in ways that weren’t that crazy, even if they turned out to be absolutely wrong.

Greed Businessman

Same with those who bought house and land packages in the outer suburbs where there is no scarcity and the local demographics are unlikely to be able to afford to pay higher prices in the future meaning that capital growth and income growth will lag the averages.

Now…You don’t have to think any of these decisions were right.

You certainly don’t have to consider them smart. Most weren’t.

But they probably made sense to the people who made them at the time based on reasoning that you may actually empathize with if you could hear the internal narrative in their heads.

People are often wrong, but few are crazy.

Two things come from that:

1. Be careful taking cues from other people when you have no idea what they’re thinking

Many finance and investment decisions are rooted in watching what other people do and either copying them or betting against them.

But when you don’t know why someone behaves like they do, you won’t know how long they’ll continue acting that way, what will make them change their mind, or whether they’ll ever learn their lesson.

Businessman Think

Each property cycle entices a new generation of unsuspecting investors to make decisions they’ll come to regret.

They’re usually enticed by the promise of easy gains or quick profits or ways to beat the odds or the banks.

As our property cycle moves on, we’ll see a new group of spruikers telling people they’ll share their secrets of property success with them.

Some will even share their “secrets” for free because they’ll be paid by the property developer who’s product they’re selling.

Others will charge a fee but deliver tainted advice, because in reality they’re enthusiastic amateurs.

Be careful who’s advice you follow – remember the team at Metropole have been involved in well over $3Billion dollars worth of property transaction and we’ve been around for decades.

Whether you’re a beginner or an seasoned property investor, if you’re looking for independent advice why not have a chat with my team at Metropole – just click here and we’ll be in contact.

2. No one is crazy, including you.

But everyone justifies actions based on poor reasoning, including you.

Few people make financial decisions purely based on logic and by using research and spreadsheets.

Businessman KitchenThey make them at the dinner table, over a Bar-B-Q or through discussions with friends

They make them based on their personal history, their own unique view of the world, their ego and pride and based on the many marketing messages they receive.

Then there’s the perceived incentives they receive like tax benefits, depreciation,  discounts, bargain.

Looking from the outside these can look crazy to others, but they weave together a narrative that works for these investors.

Let’s be honest – I do this. You do it.

The bottom line:

The fun part of behavioural finance is learning about how flawed other people can be.

The hard part is trying to figure out how flawed you are, and what stories make sense to you but would seem crazy to others.

Businesspeople Hands Showing Thumb Up And Thumb DownThat’s why when making significant property decisions it’s important to have a team of independent, unbiased advisors on your side.

They’ll steer you in the right direction.

They’ll see your blind spots.

We all want to think they we are rational and biases are things that afflict other people.

However our brains are designed with blind spots and one of their 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.

Here’s what you can do about this?

If you’re looking at buying your next home or investment property here’s 3 ways we can help you: Man Having Questions

Sure our property markets are improving, but correct property selection is even more important than ever, as only selected sectors of the market are likely to outperform.

Why not get the independent team of property strategists and buyers’ agents at Metropole to help level the playing field for you? We help our clients grow, protect and pass on their wealth through a range of services including:

  1. Strategic property advice. – Allow us to build a Strategic Property Plan for you and your family.  Planning is bringing the future into the present so you can do something about it now! Click here to learn more
  2. Buyer’s agency – As Australia’s most trusted buyers’ agents we’ve been involved in over $3Billion worth of transactions creating wealth for our clients and we can do the same for you. Our on the ground teams in Melbourne, Sydney and Brisbane bring you years of experience and perspective – that’s something money just can’t buy. We’ll help you find your next home or an investment grade property.  Click here to learn how we can help you.
  3. Wealth Advisory – We can provide you with strategic tailored financial planning and wealth advice. Click here to learn more about we can help you.

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Michael Yardney

About

Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


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