02 Mar Further bias in investing
Michael Yardney introduced you to the concept that there are a number of biases that can significantly impact your investment decisions.
Today we look at a few more that may be holding you back from reaching your investment goals and dreams.
Read the transcript here:
Kevin: Over the last couple of weeks, I’ve been talking to Michael Yardney from Metropole Property Strategists about the psychology of success. Fascinating, this subject, because sometimes between a person and success could be themselves. They could be right in the middle of it, holding it back.
Michael: That’s right, Kevin. Over the last couple of sessions, we introduced the concept that there are a number of biases that can significantly impact our investment decisions. Some of them are fairly common ones, such as being biased towards overwhelming negativity or positivity, like we spoke about in our last session, but others are not as clear-cut to us. Let’s go through a couple more, Kevin.
Kevin: Yes, please.
Michael: One that psychologists like describing is called the status quo bias. This describes our tendency to stick with what we know whether or not it’s actually the best course of action. It could be as simple as being the same brand generic groceries or as complex as just sticking to holding onto that underperforming property.
People partly do this because they want to avoid costs, even when it’s apparent that the costs are going to offset a larger gain in the long term. Psychologists call this loss aversion; it explains why so many Australians are willing to stick their money in a plain old bank account earning minimal interest today, rather than taking what they perceive is the risk of property investment.
I’ve found most investment decisions have got an alternative. One is to remain as it is, to do nothing, while the other is to actually do something. Psychologists have shown that most of us disproportionately stick with the status quo – in other words, doing nothing – rather than the potential risk in our minds of doing something, even though in my mind, it’s sometimes pretty obvious that you actually have to change, do something.
Kevin: Yes. You know the old saying, Michael, about the best way never to make a mistake is never do anything, or never even get out of bed.
Michael: That’s exactly right. They’re worried about making a mistake, and so in the process of doing that, they’re making a bigger one, aren’t they?
Kevin: Indeed they are. What about the difference between being a success and being a survivor?
Michael: Well, the misconception is that you should focus on successful people, so a lot of people keep reading magazine articles, books about people who’ve survived, who have done really well, when in fact I’d be suggesting that the differences between success and failure are sometimes invisible if all you do is keeping reading about successes.
If you’re looking at other people’s successes, you could be missing out on all those 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, reading property investment success stories, your knowledge of the world happens to be strongly biased, but it’s also enormously incomplete.
The trick when you’re looking for advice is not only to learn what to do, but also to learn what not to do from those who have had some failures.
Kevin: Exactly. What’s it called? The university of hard knocks – talking to people who’ve had a failure.
Michael: We’ve been there, haven’t we, mate?
Kevin: We sure have, indeed. What about jumping on the bandwagon?
Michael: That’s one I think we all would recognize as the psychological phenomenon when people do something primarily because other people are doing it. The bandwagon effect has got wide implications, but it’s commonly seen during those strong property markets when the media stirs up a frenzy, and it’s one of the factors that leads to property bubbles.
The tendency of people to align themselves and their behaviors and beliefs with others is sometimes called the herd mentality. But we know the herd’s usually wrong. Most property investors, they never build a substantial portfolio. So it pays to remember that just because everyone else is doing it doesn’t mean you’ve got to follow the crowd.
In fact, smart investors tend to invest counter-cyclically. Remember what Warren Buffett said: “Be fearful when others are greedy, and be greedy when others are fearful.”
Kevin: Some of us think we’ve got more control than others, don’t we?
Michael: Following on from that bandwagon bias, restraint bias is the tendency for us to over-estimate our ability to control impulsive behavior. Will that extra chocolate really make a difference if you’re watching your weight? Maybe you should just spend another hour on the Internet, or maybe you’re going to actually do something more productive.
Our lives are full of temptations, and some of us are better at resisting than others. Psychologists say that the very people who think they’re most restrained are most likely to be impulsive. Can I give you an example of this?
Kevin: Please do, yes.
Michael: Only yesterday, I was speaking with an investor who has built a substantial property portfolio, and he was doing it for the long term, but now as he’s starting to change his life and retiring, he was going to sell up his properties.
He had the intention, he had the plan of a long-term investment, but now the fear of having debt, even though it’s good debt and appreciating debt, he hasn’t got the self-control to stick with his plan, even though he knows it’s the right thing. But then once we spoke about it, he realized how biased he is and that he was doing it the wrong way.
Kevin: Great story. Just to round this interview out, I reckon probably one of the most dangerous biases is not recognizing that you have a bias in the first place.
Michael: That’s a good one. You’re right. Arguably it is the most damaging bias, because we all have blind spots, which means we’re not likely to recognize these psychological influences on ourselves. We think we’re objective when we’re not. So if you think that this session isn’t about you…
Kevin: You’re wrong.
Michael: It really is. That’s right.
Kevin: And on that note, Michael, I think we might say farewell for today. We’ll catch you next week; might talk more about this next week in the show, too.
Michael: My pleasure, Kevin.
Kevin: Michael Yardney from Metropole Property Strategists.