Many investors fail to take into consideration this one simple thing.
A property investor is, by definition, someone who purchases property with the intention of making an income or a profit.
But with less than 50 per cent of investors sticking it out for more than 5 years and up to 90 per cent never owning more than one or two properties, there is enough evidence to indicate that being successful is more complicated than just buying properties.
“How do I become a successful property investor?” is the million-dollar question that fuels an industry in and of itself.
The answers centre around buying in the right location, in the right market, for the right price, and at the right time – a veritable perfect storm of conditions.
The X factor
However, there is a major X factor that is not considered in that equation: you.
Each person comes into property investing with their own set of prejudices, misconceptions and biases that affect their decision making ability and influence everything from the types of properties they will consider, to the advice they will take on board, and even whether they will actually invest in property.
While an investor may believe that they have done everything possible to form an objective viewpoint on a potential property investment, true objectivity is practically impossible and the truth is only relative.
You see, our brains are wired to make sense of the world and then work within those boundaries.
This means that some things naturally don’t make the cut, because we don’t value them or have enough exposure to them.
And other things become prominent enough that our brain actually creates shortcuts, and we don’t even have to think about them before registering exactly what they are.
Take this for a random example:
If you love ice-cream, you are very familiar with its attributes – sweet, creamy, cold – and you make an instant connection whenever you see a cone or a scoop.
But if someone tries to give you those strange ice cream dots (a big craze in the United States that hasn’t quite taken off in Australia) it throws you for a loop and takes a bit longer to register.
We form biases to help us make sense of the world.
A fascinating experiment that was published in Political Behaviour in 2005 gives us valuable insight to the effect of our prejudices and biases. The study tested whether false or unsubstantiated beliefs about politics could be corrected.
The researchers found that media reports not only reaffirmed previous beliefs, but actually strengthened them. The participants ignored information that didn’t fit their worldview and clung on to that which did.
In other words, we tend to seek out information that tells us what we already believe.
This information – and the inherent biases – becomes very interesting when applied in a property investing framework.
1. We get stuck in our ways
The political bias study showed that clearly, we don’t like change.
In fact, change causes us so much discomfort that we are driven to rationalise or justify the information that sits most comfortably with us – through a process called cognitive dissonance.
For example, an investor’s strategy could be buying cash flow-positive properties in regional Australia. Even when valid evidence such as minimal rental and capital growth show his properties are underperforming, he is able to justify his purchases and back them up with information that supports his belief that this was the best investment strategy for him.
2. Changing our ways takes work
Change actually means reprogramming our brains and working through the discomfort of cognitive dissonance.
When real estate ‘gurus’ use blanket advertising approaches to attract investors to their strategies, it is generally ineffective and extremely difficult to get a conversion. Instead, the strategies either need to appeal to existing biases or be much more personalised, with worthy and realistic incentives.
3. Doing research may not be as helpful as it seems
The idea we have that more information is better is not necessarily true.
It is easy to get bogged down in the amount of good information out there, but conservatism bias – and the results of the above study – tells us that we have a tendency to overestimate the agreeable points and underestimate the disagreeable points to help reinforce our current or traditional views.
Therefore, no amount of reading is going to make much difference, because we pick and choose what we read and then only pay attention to the information that suits us anyway.
4. Our investing strategy may be a result of our past biases, more than any current research or advice
As mentioned above, we pay attention to the information that builds on what we believe – but where do these beliefs come from originally?
If you grow up in an environment that values investing, you will be more naturally wired to consider it yourself as it is already part of your worldview.
Similarly, if you have never lived in an apartment or different city, it might be difficult to invest in that style or location.
When you already have such biases, it is easy to find information that backs them up.
5. The advice we get is biased
Just as we are biased, so is the information we get from other sources.
We are familiar with media and political biases, but there are also prejudices and misconceptions that come through real estate agents, accountants and other experts.
Be careful though, as group attribution error could have you writing off an entire property market or strategy when you really shouldn’t.
Group attribution error is when you believe the characteristics of an individual group member are reflective of the group as a whole.
If you have a bad experience working with a particular real estate agent, for instance, you shouldn’t necessarily swear against working with all real estate agents. And if you have a negative property outcome, you shouldn’t write off all property investments as a no-go zone.
So what can you do to safeguard yourself as an investor and make smart investment decisions, if all of your biases mean it is impossible to be objective?
1. Do your research with key questions and specific goals in mind, to help keep you focused.
2. Be aware of your tendency for biases and surround yourself with a good team.
3. Be careful who you listen to. There is a lot of hype out there that feeds into some of the more common biases, prejudices and misconceptions.
4. Seek evidence for complimentary and contrary views. When you are considering a property investing mentor, the proof should be in the pudding. You should look for experts you can trust, who have extensive experience, portfolio success and other happy clients.
There is no such thing as true objectivity; even the news reporter preparing their daily bulletin struggles to remove all their bias and opinion when reporting on the facts, because every interaction we have in life is informed by our previous experiences.
As a property investor, the best you can do is to be aware of the biases you hold and aim to be as open to new information as possible. This will put you in good stead to keep learning, growing and evolving, while making smart decisions that move you and your portfolio forward.