Confirmation bias
Beware ‘confirmation bias’. Image – Shutterstock.
  • Investors should be wary if they are 'looking for confirmation'
  • They risk ignoring the pitfalls because of emotion
  • Need to step back to see unbiased bigger picture

Even the smartest of people can make silly investment decisions against all conventional wisdom – sometimes when it’s based on emotion.

They can even conduct thorough due diligence beforehand, fooling themselves into thinking they’re making an informed choice based on proper reason as well as solid evidence and analysis, and believe it shows a good potential return on investment.

Over the course of my career, I’ve met a number of people who have one of these types of deals they wind up regretting eventually.

And none of them rushed in. They didn’t take a blind leap of faith. They weren’t coerced or manipulated. At the time, they genuinely believed they’d done everything they were meant to do.

Research. Asking for advice. Looking at the numbers.

But they still made a poor choice that ended up being an albatross around their neck. How? It’s a little thing called confirmation bias.

Looking for confirmation

Confirmation bias occurs when someone has already made up their mind about something, even if they don’t truly realise it, and they look for information to back up their reasoning.

Let’s say a would-be property investor is considering a deal in a particular suburb. They might do all of the things a good investor should do, like researching the pros and cons of the area, seeking guidance and advice, getting a sense of its future prospects, and crunching the long-term data.

On the face of it, you’d say that their eventual decision to buy or walk away was based on really solid due diligence.

But confirmation bias occurs when the investor chooses to rely on only the information that supports the decision they’ve already made.

They want to buy in that suburb, so they’ll ignore any contrary data or lean heavily on ambiguous information that could really lead to either conclusion.

The area could be bordered by a busy and noisy international airport on one side, but a would-be investor with a bad case of confirmation bias might look at the convenience factor to push aside any obvious red flags.

They can excuse any downsides by hamming up the perceived upsides. It’s almost like the early stages of a new relationship with someone you really like. He or she has a wild temper and drinks too much… but they’re a fantastic conversationalist with piercing blue eyes… so, ‘why not’ you think?

Caution needed

It goes without saying that confirmation bias can be a massive, expensive, and stressful trap for investors, but it’s one that’s hard to spot when you’re in the thick of it.

Buying real estate is one of the biggest decisions people make in their lives. Whether it’s their first property that kickstarts their lifelong journey in the world of bricks and mortar, a dream forever family home, a debut investment, or the latest addition to their portfolio, it’s a massive deal.

Property unlocks enormous potential in people’s lives. It provides security and certainty. It’s a safety net and a nest egg for the future. It’s something to help fund the golden years, or a gift to pass on to the kids.

Done well, investing in property can help achieve ambitious goals and put you on a solid path. But missteps can be costly.

Investors with confirmation bias are setting themselves up for potential disaster. Perhaps it’s a specific area they love because they grew up there, they aspire to retire there, they’ve got relatives nearby, or they’re inspired by desire for status.

Maybe it’s a particular building they love – some Art Deco marvel, a historic residence they’ve always driven by and dreamed of living in.

Perhaps it’s a type of property, like a unit at the beach, a resort timeshare, a country homestead, or a hobby farm.

And rather than understanding the investment fundamentals – and accepting them – a would-be investor with confirmation bias will seek out the information that confirms their thinking, or people who agree with them, and go ahead and buy.

I’m not saying any, or all of these, are bad decisions. What I’m saying is that buying based on confirmation bias, where any pitfalls are ignored because of an emotion-driven decision that’s already been made, is extremely risky.

Independent advice

Working with a qualified, experienced, and independent buyer’s agent can help protect you from developing a case of confirmation bias.

When you enlist a buyer’s agent, you’re adding an expert to your team who can help achieve your property goals by finding potential properties that meet your set of criteria.

They scope the entire market, including off-market opportunities that you wouldn’t ordinarily have access to, and then negotiate on your behalf to buy the one that best fits the bill – and for the best possible price.

But more than that, with a buyer’s agent you’re also getting a voice of reason. They don’t operate based on emotion. They work with your best interests in mind.

They present a series of recommendations based on your needs, wants and budget, and help you to consider what’s right for you.

Rather than sticking stubbornly to an idea because of how you ‘feel’ about it, they help you to step back and look calmly at the bigger picture.

They’re your wingman or woman. They’ve got your back. They’re the calm and measured authority to give you a reality check if you need it.

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Before making any decisions, please do your own independent research, taking into account your own situation. This article does not purport to provide financial, taxation, or investment advice. See our Terms of Use.

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