Episode Details

Did you know that as investors and even as entrepreneurs or businesspeople we can sometimes be our own worst enemy?

It's not because of the decisions we make, the opportunities we consider or the investments we miss out on, but rather, it's due to the way we think.

It's because of our Cognitive Biases.

You see, most of think we're rational people. But we're not.

There is no shortage of cognitive biases out there that can trip up our brains.

Cognitive biases are patterns of thinking that don't rely on logic.

And if you don't check your reasoning, they can lead to judgements and decisions that negatively impact your business.

You can't eliminate them all, but you can become more aware of how they function and ways to counteract them.

And that's what I'm going to discuss today with Pete Wargent

Types of Cognitive Bias

1. Confirmation bias

People tend to search for information that confirms their view of the world and ignore what doesn't fit.

In an uncertain world, we love to be right because it helps us make sense of things.

We do this automatically, usually without realizing; partly because it's easier to see where new pieces fit into the picture puzzle we are working on, rather than imagining a new picture.

Confirmation bias also prevents us from looking objectively at an investment we've already made.

One way to counter confirmation bias is to read things you're going to disagree with. In other words, read all you can from reputable sources, whether it's confirming your original view or not.

Another is to look for reasons your strategies could be wrong, rather than right.

2. Anchoring bias

We have a tendency to use anchors or reference points to make decisions and evaluations, and sometimes these lead us astray.

Anchoring explains why you'll pay $6 for an hour of parking after seeing $10 at a car park down the street.

Whether we like it or not, our minds keep referring back to that initial number.

It's important for you to evaluate any property deal based on its own fundamentals and all the information you have available from your research and due diligence at the time.

3. Awareness bias

How are your investments performing – are you happy with the results you're getting? There's a chance that even if they're not doing so well, you may not even recognize it.

In fact, it's been shown the poorest performers in all arenas of life are the least aware of their own incompetence.

Lacking the capacity to realize how badly a task is performing is known as the Dunning-Kruger effect.

If you're the smartest person on your team you're in trouble.

It's best to work with mentors and professional advisors.

4. Positivity bias

Many people view residential real estate positively, considering it an asset class through which they can grow their wealth – and they continue to do view it in this light, even if their investments fail to prosper.

In the face of lack of capital growth, prolonged vacancies or inflated expenses, they still continue to believe that their investment will turn the corner "one day."

The problem with this is that when all signs point to a dud investment, it likely is one – but positivity bias can stand in the way of an investor taking action to rectify the situation.

Overconfidence is a real risk for property investors – one of the best things an investor can do is admit what they don't know and get a good team of professionals around them.

5. Negativity bias

Just as some investors can be overly positive this is the tendency to put more emphasis on negative experiences rather than positive ones. property information

People with this bias feel that 'bad is stronger than good' and will perceive