Did you know that as investors and even as entrepreneurs or businesspeople 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’s because of our Cognitive Biases.
You see, most of think we’re rational people.
But we’re not.
There is no shortage of cognitive biases out there that can trip up our brains.
Cognitive biases are patterns of thinking that don’t rely on logic.
And if you don’t check your reasoning, they can lead to judgements and decisions that negatively impact your business.
You can’t eliminate them all, but you can become more aware of how they function and ways to counteract them.
And that’s what I’m going to discuss today with Pete Wargent
Types of Cognitive Bias
- Confirmation bias
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 realizing; 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.
Confirmation bias also prevents us from looking objectively at an investment we’ve already made.
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.
- 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.
Whether we like it or not, our minds keep referring back to that initial number.
It’s important for you to evaluate any property deal based on its own fundamentals and all the information you have available from your research and due diligence at the time.
- 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 recognize 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 realize how badly a task is performing is known as the Dunning-Kruger effect.
If you’re the smartest person on your team you’re in trouble.
It’s best to work with mentors and professional advisors.
- 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 do 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 that 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.
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.
- Negativity bias
Just as some investors can be overly positive this is the tendency to put more emphasis on negative experiences rather than positive ones. property information
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.
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 minimize your risks and maximize your upside if you educate yourself and become financial fluent, follow a proven strategy and get a good team around you.
- 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 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, businesspeople 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.
- 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.
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.
- 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 behaviors 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.
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 Buffet said: “Be fearful when others are greedy and be greedy when others are fearful.”
- 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? business data success
Will you spend that extra hour on the Internet when you have more important things to do?
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.
As a property investor you should consider getting the independent property strategists at Metropole to not only help you formulate a property strategy that is proven and has stood the test of time, but also to help you annually review your property portfolio objectively.
- Bias bias
Failing to recognize 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 recognize 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.
The reality is that everyone comes into investing with their own predispositions and we are all prone to errors in judgment.
The sooner you realize 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 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.
Links and Resources:
Join us at Wealth Retreat 2020 in October –find out more here
Pete Wargent’s new book Low Rates High Returns
Some of our favourite quotes from the show:
“You actually don’t treat real estate investing as you do stock market investing. It’s very very different.” –Michael Yardney
“You do need cash flow coming in from other areas so it’s a balance.” –Michael Yardney
“I’ve often said that there’s no such thing as a rich victim.” –Michael Yardney
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