How buyer bias affects the real estate market—Part II
Jun 29th, 2015 | By FCT
Last time, in part I, we did a haircut (as they say in Hollywood of quick and dirty surveys) of the major biases which influence buyer and seller psychology around a housing deal; it’s common ground that real estate professionals suffer from the same biases, only they’re often (especially on the commercial real estate side) even more susceptible than regular folks to the downsides of their own biases.
This time out, we’re going to shave close and see what happens when biases queue up and interact; we’ve already seen that over-optimism and over-confidence amplify one another and that confirmation bias and hindsight bias can make the ugly look pretty darn good…in our imaginations.
Here’s one we’ve all experienced: momentum bias. Human beings like positive trends so much we sometimes make them up—which is why, perversely, people buy into a rising market. We tend to believe that the momentum of a market will continue indefinitely, because it’s moving upwards now. Problem is, what we see isn’t a physical process, like a rocket soaring into the stratosphere: it’s a price movement, a far more fragile thing. Nonetheless, recent research documents illustrate that upwards of 80% of buyers surveyed bought their house because all around them prices were rising.
This bias is called herd behaviour. We like to think we make decisions on discrete, independent thought: we often don’t. We listen to neighbours and reckon “not everybody can be wrong” is good market analysis. As night follows day, expectations rise and, sometimes, when things really go south, bubbles form, and are what US Federal Reserve Board chairman Alan Greenspan refers to in hisimmortal term, “irrational exuberance.” (The root of the phrase is actually real estate: it’s derived from the work of 2013 Nobel Prize-winning economist Robert Shiller, who designed the Case-Shiller home price index.)
Regret theory (my personal favourite) describes what happens when people enter a market to avoid regret of not having entered the market, a circular “logic” if ever there was one. And since you’re persuading yourself, it’s a pretty compelling logic. Except it’s not: it’s entirely self-centred and all about “preventing” discomfort. No such thing in any marketplace, ladies and gentlemen. Markets are inherently uncomfortable places: they’re where risk lives and breathes.
In part II of REAL ESTATE 101b coming up in July, ‘this is your brain on real estate’ we’ll take apart our all-too-human thought processes and see what happens when we strip out the emotional rollercoaster of riding the market and focus on market fundamentals that truly matter.