Apparently, around 8.6 million Australians bought a lottery or scratchy ticket in the last year.
That’s around 44.8% of our 18+ population.
Who is buying all 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.
They may be misinformed.
They can have incomplete information.
They can be bad at math.
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 must make sense to them at 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.
I’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 – the 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.
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.
But you can imagine it going something like this:
“I’m living paycheque to paycheque 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.
I believe the lottery is a tax for people who can't do maths.
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.
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.
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But they probably made sense to the people who made them at the time based on the 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:
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 as 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.
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.
And that's what's happening currently as we've experienced strong property markets for about a year now and despite all the concerns about Covid, the media keeps reminding us how much the value of properties around Australia are rising each week.
I recently read a headline that said something along the lines of "Your house is earning more than you are at present!"
Some are taking shortcuts buying secondary properties while others are so worried they're going to miss out on future capital growth that they're buying properties off the plan hoping that capital growth before they settle will solve their financial problems
And 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 whose product they’re selling.
Others will charge a fee but deliver tainted advice because, in reality, they’re enthusiastic amateurs.
Be careful whose advice you follow – remember the team at Metropole have been involved in well over $4 Billion dollars worth of property transactions and we’ve been around for decades.
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.
They 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 are 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 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.
That’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 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.
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