When it comes to the the gyrations of the markets, investors often don’t react as rationally as they might think.
Without knowing it we are pre-programmed with a range of biases which cause us to interpret information incorrectly and therefore make poor investment decisions.
Put simply – our emotions threaten to commandeer our common sense and warp our memory.
One such bias is called recency bias
Recency bias is basically the tendency to think that trends and patterns we’ve observed in the recent past will continue in the future.
It causes us to unhelpfully overweight our most recent memories and experiences when making investment decisions.
We expect that an event is more likely to happen next because it just occurred, or less likely to happen because it hasn’t occurred for some time.
This bias can be a particular problem for investors in financial markets, where mindful forgetfulness amid an around-the-clock media machine is more important today than ever before.
What happens is that when times are good we have a tendency to believe that they will remain so forever.
That’s one of the reasons are most confident at the peak of our property markets when they should be more cautious and most fearful during property slumps when there is little downside left.
Maybe that’s why Warren Buffet said:
Be fearful when others are greedy and be greedy when others are fearful.
Recency bias is further compounded by “confirmation bias,” best described as an investor’s selective memory.
Confirmation bias leads us to pick and choose the memories best served to fuel our pre concieved ideas.
People tend to search for information that confirms their view of the world and ignore 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 as the same time ignoring information that may indicate the investment may be a questionable one.
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.
So what can you do to avoid these biases?
Simple – get some independent advice from experts in their field.
If you’re looking for independent advice, no one can help you quite like the independent property investment strategists at Metropole.
Remember the multi award winning team of property investment strategists at Metropole have no properties to sell, so their advice is unbiased.
Whether you are a beginner or a seasoned property investor, we would love to help you formulate an investment strategy or do a review of your existing portfolio, and help you take your property investment to the next level.
Please click here to organise a time for a chat. Or call us on 1300 20 30 30.
When you attend our offices in Melbourne, Sydney or Brisbane you will receive a free copy of my latest 2 x DVD program Building Wealth through Property Investment in the new Economy valued at $49.
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