18 Mar I knew it all along! Common investor mistakes
Michael Yardney from Metropole Property Strategists shares a few more helpful pointers on why investors often get it wrong and what you need to do to get it right. We are talking about the procrastination, hyperbolic discounting and information overload.
Kevin: I was talking to Michael Yardney last week in the show, and we have been discussing, over the last few weeks, the psychology of success and the things that hold us back. We get in our own way. We’re our own worst enemy.
But what about procrastination, Michael? This is the one, apart from negativity, that I hate the most.
Michael: This is deciding to act in favor of the present over investing in the future. Look, we all procrastinate at times, but in the arena of property investment, those who sat on the sidelines over the last couple of years waiting for the investment horizon to look clearer, they’ve actually missed out on some fantastic opportunities.
You have to decide the difference between doing your homework and doing your research, and then getting stuck in analysis paralysis and procrastinating. As you say, Kevin, that’s a very big problem for many beginners.
Kevin: What about the people who are content with the present, as opposed to the adventures and what the future may hold?
Michael: Psychologists call this hyperbolic discounting. It’s a fancy word for the tendency for us to prefer smaller pay offs now rather than a larger pay off in the future. It leads us to disregard the future. It’s a bit like “eat, drink, and be merry, for tomorrow you may die.” That’s because the consequences that occur later in time, way out in the future, whether they’re good or bad, seem to have a lot less bearing on our choices today.
Now, financial institutions, banks, and credit card companies build their businesses on this hyperbolic discounting because borrowing money and paying interest are actions that spend future resources for the benefit of that one-off gratification now.
I guess that’s one of the reasons that Warren Buffett said, “Wealth is the transfer of money from the impatient to the patient.” It’s important in wealth creation to have a long-term perspective, Kevin.
Kevin: Yes. We’ll look back now. What about the people who say, “I knew it all along. I knew that was going to be the case.”
Michael: Oh, yes. How many people predicted the global financial crisis, the property boom, or the property bubble?
Kevin: Yes, and they continue to.
Michael: Yes, they do. Hindsight bias is the tendency for people to overestimate the ability to have predicted an outcome that they couldn’t possibly have predicted. The problem is that too often, we actually didn’t know it all along. We only feel now like we probably did then.
Ultimately, this hindsight bias does matter, though, because it gets in the way of us learning from our experiences. If you feel like you knew it all along, it means you don’t stop to examine why something really happened.
Hindsight bias can also make us over-confident, Kevin, and it actually clouds our judgments.
Kevin: Is it a fallacy and a fault, too, to think that we can control the uncontrollable?
Michael: Yes, Kevin. Delusion of control is a tendency for all human beings. We believe that we more or less influence the outcomes that, in fact, we have no influence over.
One simple form of this fallacy is found in casinos when you roll the dice in craps. You’ve seen them in the movies. They actually throw the dice harder to get a higher number or throw it softer to get a lower number.
In property, the concepts much the same if you think you have all your risks covered. In my mind, risk is what’s left when you thought of all the things that could go wrong.
Kevin: Indeed. What about information overload, analysis paralysis?
Michael: This is the tendency to seek information which actually doesn’t affect our actions. More information isn’t always better, Kevin. Indeed, with less information people can often make more accurate assessments because too much information, as you say, does lead to paralysis.
I’ve found successful investors take action knowing they don’t know everything. But they know they know enough to get started, and they’re prepared to learn the rest along the way.
Kevin: Michael, what about the people who make a mistake? They know they’ve made a mistake, but they rationalize it to themselves and try to rationalize it to other people, as well?
Michael: Oh, we’re humans, aren’t we? That’s called post-purchase rationalization. We all do this in some form or another at some point of our life. We buy something and it’s not up to the standard we expect, yet we want to believe we didn’t waste our time, our energy, our resources, so we rationalize our purchase.
It happens more often with impulse buys than when we have a carefully planned investment decision. Yet, many investors get carried away. They buy one of the first properties they see that first weekend or when they get excited at a seminar and sign up for a property at the back of the room, when boy, they should have known better, Kevin.
Kevin: Michael, what’s the bottom line?
Michael: There are probably a lot of biases that we experience, and therefore it’s important to recognize them.
One of the big ones is personal history bias. Depending upon your experience in life, your viewpoints will likely influence your attitude to investing as to everything else. Research shows that the way you feel about a topic is generally pervasive and was most likely shaped by the experiences in your youth.
Someone who grew up in the Great Depression – like our parents would have – for example, a much, much different attitude towards money and investing than someone who grew up in a family that experienced financial prosperity in the 1980s. These influences are going to show in the risks they’re willing to take, investments that appeal to them, and how they’re going to handle money and wealth, Kevin.
Kevin: Indeed. Michael, it’s been great talking to you about the psychology of success. I’ve learned so much over the last few weeks. Thank you.
Michael Yardney from Metropole Property Strategists. Thanks, mate.
Michael: My pleasure, Kevin.