Jul 30, 2018
Are you where you want to be financially? If not, what’s holding
That’s what we’re going to talk about in today’s show.
If you’re like most Australians, you’re probably not where you
expected to be financially.
Even if you’re doing well, understanding behavioural finance can
help you do better.
We make thousands of decisions every day.
We usually make these decisions with almost no thought and this
can lead to predictable errors in certain circumstances.
Bias: The tendency to search for information that
confirms your view of the world and ignore what doesn’t fit.
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.
Bias: The tendency to use anchors or reference points
to make decisions and evaluations, even though sometimes these lead
us astray. The first number you see, especially when it’s a price
that comes up in negotiation, colours any that come after it. A
high anchor influences you to spend more than you normally would.
Whether we like it or not, our minds keep referring back to that
initial number, and perceive any subsequent offers as being a
discount or a deal, even if they’re objectively still too
Bias: There’s a chance that even if your investments
are not doing so well, you may not even recognise it. it’s been
shown the poorest performers in all arenas of life are the least
aware of their own incompetence. Lacking the capacity to realise
how badly a task is performing is known as the Dunning-Kruger
- 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. Positivity bias can stand in the way of an
investor taking action to rectify the situation.
Bias: Just as some investors can be overly positive
this is the tendency to put more emphasis on negative experiences
rather than positive ones. People with this bias feel that ‘bad is
stronger than good’ and will perceive threats more than
opportunities in a given situation.
- 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 a property investment.
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.
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 behaviours with
those of a group is also called “herd mentality.”
Bias: Following on from bandwagon bias, restraint
bias is the tendency for people to overestimate their ability to
control impulsive behavior. Psychologists say the very people who
think they are most restrained are also most likely to be
- The Ostrich
Effect: When an ostrich is scared, the bird
supposedly buries its head in the sand to stay ignorant of the
approaching threat. While we simply don’t have the neck length to
literally stick our heads in the sand, people often deliberately
look away from their money problems.
Bias: This is the tendency to prefer the things you
own (even if they have flaws) over the things you don’t, because
you made “rational” choices when you bought them. You may be
convinced the investment you’ve just made is great because you
spend so much time, research and emotion in selecting it. You
rationalize your past choices to protect your sense of self.
Illusion: This is the tendency to see patterns in
random events. This selective thinking can lead to wrong
conclusions when faced with the multitude of mixed messages we
receive about the property market.
- Curse of
Knowledge: You suffer from the curse of knowledge
when you know things that other people don’t and you’ve forgotten
what it’s like to not have this knowledge. Highly intelligent
people often have difficulty asking for help or taking advice
because they think they should be able to work things out for
of the worst things that can happen to an investor is to get it
right the first time they buy a property. This often happens when
you invest during a property boom because you tend to think you’re
smarter than you are. The best defense against this is to continue
to ask questions and be skeptical of your preconceptions.
course, we all procrastinate at times, but in the arena of property
investment those who sat on the sidelines over the last few years
waiting for the investment horizon to look clearer, have missed out
on some fantastic opportunities.
Discounting: This is the tendency for people to
prefer smaller payoffs now over larger payoffs later, leading one
to largely disregard the future when it requires sacrifices in the
Bias: This is the tendency for people to overestimate
their ability to have predicted an outcome that could not possibly
have been predicted. hindsight bias matters because it gets in the
way of learning from our experiences because if you feel like you
knew it all along, it means you won’t stop to examine why something
really happened. Hindsight bias can also make us overconfident in
how certain we are about our own judgments.
- Illusion of
Control: Illusion of control is the tendency for
human beings to believe they can control or at least influence
outcomes that they demonstrably have no influence over. In property
it’s the concept that you think you’ve got all your risks covered.
In my mind risk is what is left after you’ve thought of all the
things that can go wrong.
Bias: This is the tendency to seek information when
it does not affect action. More information is not always better.
Indeed, with less information, people can often make more accurate
assessments because too much can lead to analysis paralysis.
Rationalization: This is what happens when we buy
something that turns out not to be up to standard. Yet, we want to
believe that we didn’t waste our resources, so we try to
rationalize the purchase. This happens much more often with impulse
buys than with carefully planned investment decisions.
Bias: There is so much information and education
available to investors that many people feel they are qualified to
make significant financial decisions, despite the fact that they
have no experience to back them up. This can lead to unfortunate
shortsighted decisions, which can be very costly if the properties
fail to perform as you’d planned.
- Personal History
Bias: Research shows that the way you feel about a
topic is generally pervasive and was most likely shaped by events
experienced in your youth. These influences will show in the risks
they are willing to take and the investments that appeal to
Bias: This is probably the most important bias of
them all – the belief that you are less biased than you really are.
If you listened to the whole show without realising I’m talking
about you, you’re suffering from bias bias.
Links and Resources:
Rich Habits Poor Habits
Some of our favourite quotes from the show:
“So, the first step to make better investment decisions is to
become aware that we’re currently making bad decisions.” – Michael
“When we make decisions that are biased, what we’re doing is
trading off some version of the right decision for a comfortable
decision today.” – Michael
“The truth is that when failure becomes invisible, the
difference between failure and success may also become invisible.”
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