Biases tend to be hard-wired and unalterable; a part of human nature. It’s difficult to pin down exactly how many proven biases there are that cause us to think and act unwisely, but what they all have in common is that they lead us to making irrational judgements and determinations – while being totally ignorant that we are doing so.
Philippe Brach, CEO of Multifocus Properties and Finance and author of Creating Property Wealth in any Market, says every cognitive bias exists as a mental shortcut that allows us to make decisions quickly and efficiently, because we don’t stop to consider all the available information.
“This saves us time and energy, so it’s easy to understand why they exist and how they can be useful.
However, these trade-offs lead to mental errors.
The field of cognitive biases is beyond the scope of this article, but there is one that is of particular relevance to investors. Everyday life can be full of self-control problems, which economists are fond of blaming on present bias. This is the tendency to over-value immediate rewards at the expense of long-term intentions, a trait that can have big implications later on in life. This inclination suggests that when we have a choice between a pay-off today and a pay-off in the future, we will nearly always choose to have the pay-off now.
If you asked someone whether they would prefer to have $150 today or $180 in one month, most often, they will choose the $150. Even though this means relinquishing a 20 per cent return on investment — which is not the smartest financial move — it makes sense, because the question is removed from the present.
Now, let’s reframe it. If you ask that same person whether they would prefer to take $150 12 months from now, or $180 in 13 months, you will find they are overwhelmingly willing to wait another month for the extra $30.
It’s still the same one-month waiting period; the only thing that has changed is the immediacy of the reward.
In an experiment conducted a few years ago to help people understand the importance of saving for retirement, participants’ future selves were made more realistic to them in the present. Their faces were digitally scanned and altered to create a realistically aged version, and they were then given a choice about how much they would allocate to their retirement.
Those who had viewed an image of their older selves, opted to put more of their savings aside.”
For the full story around bias and how it impacts your ability to make sound property decisions, read the full indepth article in the April 2019 edition of Your Investment Property magazine.
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