Maybe you’re too biased to become a successful property investor?
What do I mean by that?
Well…did you know that we can sometimes be our own worst enemy as property investors?
By the last count, I’ve read that there are 188 types of these fallible mental shortcuts in existence, and they constantly impede our ability to make the best decisions about our careers, our relationships, and for building wealth over time.
So, whether you are a beginner or an experienced investor, whether you’re in business or an entrepreneur you’ll enjoy my chat today with Mark Creeden, founder and CEO of Business Accelerator Mastermind as we discuss why seemingly rational people act irrationally when it comes to money.
Cognitive Biases You Need to Know
Without always knowing it, property investors are pre-programmed with a range of biases which may cause them to interpret information incorrectly and thus undertake sub-optimal investment decisions.
You see, most of us think we’re rational people but we’re not.
There is no shortage of cognitive biases out there that can trip up our brains.
However, because cognitive biases are based on generalizations and assumptions, they can’t always be correct.
And if you don’t check your reasoning, they can lead to judgments and decisions that negatively impact your business.
- 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.
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.
- Anchoring bias
We have a tendency to use anchors or reference points to make decisions and evaluations, and sometimes these lead us astray.
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.
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?
It’s been shown the poorest performers in all areas of life are the least aware of their own incompetence, a phenomenon 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 a team of mentors and professional advisors.
- Positivity bias
In the face of lack of capital growth, prolonged vacancies, or inflated expenses, some investors 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.
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.
Our ancestors evolved a brain that routinely tricked them into making three mistakes: overestimating threats, underestimating opportunities, and underestimating resources.
This helped keep them alive.
It’s a great way to pass on genes, but a lousy way to promote quality of life or grow your wealth through property.
Fact is: there will always be property pessimists around, but you can minimize your risks and maximize your upside if you educate yourself and become financially 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.
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 property investment.
Successful investors, businesspeople, and entrepreneurs 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.
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.
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 lead 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.
It pays to remember that just because everyone else is doing it, that doesn’t mean you should follow the crowds.
- Restraint bias
Following on from bandwagon bias, restraint bias is the tendency for people to overestimate their ability to control impulsive behaviour.
Psychologists say the very people who think they are most restrained are also most likely to be impulsive.
- 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.
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 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.
Links and Resources:
Why not join Metropole’s Business Accelerator Mastermind
Learn more about Mark Creedon – Business Coach to some of Australia’s leading entrepreneurs
Get a copy of Mark’s new book here – Have a Business not a Job
Get a bundle of eBooks and reports – www.PodcastBonus.com.au
Some of our favourite quotes from the show:
“It’s actually not as much the investment, it’s about the person.” – Michael Yardney
“In fact, it’s been shown the poorest performers in all areas of life are the least aware of their own incompetence.” – Michael Yardney
“There will always be pessimists around, but I don’t really know any rich pessimists.” - Michael Yardney
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