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What’s Standing Between You And Success?

In our last issue, Michael Yardney introduced the concept that there are a number of biases which can significantly impact your investment decisions. In part two of this series, he looks at a few more biases that may be preventing you from reaching your investment goals.

By: Michael Yardney

31 May 2016

The Term Status Quo Bias describes our tendency to stick with what we know. It could be as simple as buying the same name-brand groceries that you always have or as complex as holding on to that underperforming property.

People do this partly because they want to avoid costs, even when it’s apparent those costs will be offset by a larger gain, being the long-term growth of a better performing property.

Psychologists call this ‘loss aversion’ and it explains why so many Kiwis are willing to stick their money in a plain old bank account earning minimal interest, rather than taking the ‘perceived risk’ of a property investment.

Psychologists have shown that disproportionately we stick with the status quo because ‘doing nothing is within the power of all men’ as we often weigh the potential losses as heavier than the potential gains.

Survivorship Bias

The misconception here is that you should focus on the successful if you wish to become successful, while the truth is that when failure becomes invisible, the difference between failure and success may also become invisible.

If all you’re looking at are other people’s successes, you could be missing the most important lessons for getting ahead from those who got it wrong.

The trick when looking For advice is to not only Learn what to do, but also Look for what not to do - Michael Yardney

The trick when looking for advice is to not only learn what to do, but also look for what not to do.

Bandwagon Bias

This is the psychological phenomenon whereby people do something primarily because other people are doing it. It is commonly seen during strong property markets where the media stirs up a frenzy and it’s one of the factors that leads to asset bubbles.

This tendency of people to align their beliefs and behaviours with those of a group is also called ‘herd mentality’, but we know ‘the herd’ is usually wrong – most property investors never build a substantial portfolio.

So, it pays to remember that just because everyone else is doing it, that doesn’t mean you should follow the crowds. In fact, smart investors tend to invest counter cyclically.

Restraint Bias

Restraint bias is the tendency for people to overestimate their ability to control impulsive behaviour. Will you have that extra chocolate when you’re watching your weight? Will you spend that extra hour on the Internet when you have more important things to do?

Our lives are full of temptations and some of us are better at resisting them than others. Psychologists say the very people who think they are most restrained are also most likely to be impulsive.

I’ve seen property investors plan to hold on during the flat few years that occur every property cycle knowing real estate is a long term investment. They might even have created a strategy or discussed a plan of attack to help guide their decisions under various circumstances.

But, when the time arrives, panic kicks in… and they react just like so many others and sell up, often near the bottom– just before the cycle turns.

Bias Bias

Failing to recognise your cognitive biases is a bias in itself. Arguably this is the most damaging bias, because having blind spots means you're less likely to recognise any of these psychological influences within yourself.

The reality is that everyone comes into investing with their own predispositions and we are all prone to errors in judgment. The sooner you realise and acknowledge these tendencies in yourself, the more open you will be to improving and making better investment decisions.


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