Property Report: Don’t let your brain play tricks on your real estate decisions

Human psychology has always interested me.

I studied the subject at university and majored in industrial psychology. I probably did not realise how critical understanding people’s behaviour would be in later years. There is no doubt that in our personal and professional lives, our decisions and attitudes are formed and guided by years of experiences and the environments in which we have found ourselves.

In real estate and investing, our paradigms, assumptions and past experiences often have a big impact on our decisions. Whether buying or selling, we are prone to a number of psychological forces that ultimately will dictate our decisions whether we like it or not.

One such force is cognitive or confirmation bias. Simply explained, everyone likes being proven correct. Most people look for information and insight to confirm what they already believe, and avoid information that challenges their pre-existing beliefs. Often, even less-than-clear evidence is used to support what people believe.

It manifests in many ways, including how we research real estate investment opportunities or market conditions. For example, a real estate investor who enjoys the benefits of a housing boom is likely to attribute his or her success to personal acumen and skill. In contrast, investors who see the value of their real estate holdings plummet tend to blame the market, other investors, or just plain bad luck. Our brains look for ways to confirm our beliefs.

Another similar trait is emotional bias. There is some overlap between cognitive and emotional bias, but both are prevalent in the real estate space. An example might be someone saying, “I purchased a home in 2007 and got burned. Why would now be any different?” or “My home is better than most others, so it must be worth more and will sell quicker.” Simply put, it is taking action based on feelings instead of fact. Emotional biases are deeply ingrained in the psychology of investors and are generally much harder to overcome.

So how can you overcome it? The first step is to recognise that your brain is programming you to confirm your own beliefs. Once you realise this, it is a question of actively seeking out information that goes against what you believe and understand. Find a view that is contrary to your own and think about it for a while.

If you are a seller, ask your agent for a comprehensive current market analysis and valuation. Do not take it personally if the findings are contrary to your beliefs.

If you are a buyer struggling to find the right investment, but perhaps being hindered by your own biases as far as location, size, style or price are concerned, listen to an expert and be more open. Ask questions. Challenge your own views. In the end, whether or not you change your stance, you would have made a conscious effort to deal with your inherent bias.

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