How Psychology Impacts our Investing

[Elizabeth M Williams]

I was reflecting on some of the initial impressions people have about multifamily syndications today, which prompted me to dig a bit deeper into the ‘why’ behind comments I’ve seen on message boards & social media, like these –‘I’m happy with my current investment decisions’ and ‘I don’t trust anyone who suggests a different strategy’‘ or I’m not interested in hearing about multifamily syndications, as I’m sure a pushy salesperson will try to convince me to do something that’s not good for me, and I don’t want to lose money’

It occurred to me that I’m no different, and further reflected on how it took me a few months to be convinced to invest in multifamily syndications. I wanted to do some digging, and discovered that there are some psychological reasons behind our often knee jerk reactions to new experiences, facts & opportunities.

The thing is, these biases could stand in the way of our own investing success, as we convince ourselves to make decisions that aren’t always in our best interest. Here are 7 common biases, you might see yourself holding a few -

1- Confirmation Bias – we tend to seek out information that confirms our viewpoints, while ignoring any inputs that don’t. It’s much easier to feel right about our belief system, rather than going out of our comfort zones and thinking outside of the box. An example in real estate – John has long believed that the real estate market in his local area is the best place for him to invest, giving the most returns, least hassle, and overall the best strategy to build wealth. He might have 2-3 rental properties giving him a few hundred bucks each a month, thereby solidifying his belief that he’s on track for his wealth-building goals. But in reality, John might not want to look at his choices objectively, to reassess his properties & look for better opportunities, potentially in other markets, for example, because this would force him to examine his own decision making.

If John becomes aware of this tendency in himself (it’s human nature, after all), then perhaps he can start looking at his investments from another viewpoint, gain an understanding of other options from reputable sources, and examine why his strategy might be wrong. This exercise goes a long way to validating one’s decisions, or to open one’s eyes to other perspectives, and is a lesson that we can apply across many areas of life.

2 - 'Rose Tinted Lenses' Bias – if we, as investors, are enamored with real estate, seeing it as our path to wealth, then sometimes we might ignore the signs when things are going wrong. If our properties sit vacant, if we have a lot of ongoing repairs (maybe we didn’t realize we overpaid for what’s now become a money pit), if we bought in the wrong area, or at the wrong time, if we paid too much, if we’re not getting enough rent to cover expenses, if our assets aren’t appreciating, we still often convince ourselves that things will improve soon, rather than admitting we might be sitting on a dud or two. If we remain overconfident to our own detriment, then we stop ourselves from taking action to change our course. Rather than seeing our investments through rose-colored lenses, perhaps it’s time to seek out professional help & re-examine our strategy.

3 - The ‘Glass Half Empty’ Bias – we all know the type, and perhaps you might even see a little bit of yourself in this, too. Personally, I’m not surprised this is such a heavy influence in our behaviors, for 2 reasons. The first is that we are hard-wired for survival, and as such, our perceptions are often skewed, leading to make mistakes, and often resulting in an overestimation of threats, and an underestimation of opportunities. The second is that it is all-pervasive in our society today. You turn on the news, log into Facebook, Twitter, or IG, and can easily be bombarded with the latest scams, scandals, crimes, threats, tragedies, all of which further reinforce our confirmation bias.

As it pertains to real estate investing, there will always be a naysayer, telling you you’re making a mistake, telling you all the things that could go wrong, when in reality, we all know that real estate runs in cycles, and is a time-tested asset class. But the more you educate yourself, speak with peers, mentors, professionals, the more you will mitigate your risks, and feel more confident about deploying a proven investment strategy. And guess what? Life is fluid, and we can always change our course in the future. And in my humble opinion, making mistakes isn't a bad thing, it's how we learn. And again, if we put the time into understanding our investments before parting with our money, we can go a long way towards lessening our risks. And doing nothing out of fear (or listening to naysayers who wag their fingers telling you all that can go wrong) is what keeps a lot of us stuck in our analysis paralysis. 

4 -The ‘I don’t Want to Change’ Bias – we have a habit of sticking with the ‘devil we know,’ even if that sometimes results in underperformance of our investments. We are creatures of habit, and we often perceive change as a bad thing – we perceive it as risky, costly, or too complicated. How many people do you know that will put money in a savings account, that doesn’t even keep up with inflation, simply because it’s what they have always done? This is a shame, because doing nothing can translate into significant losses, otherwise known as opportunity cost.

Again, we often perceive change as a risk, and our brains trick us into believing that the risk of losses can outweigh the risk of gains. It’s helpful to try to take a 1000 foot view of our own approach, or to speak with someone who can advise you from an objective perspective, so that you can keep moving forwards, rather than stay stuck in a mindset that can directly impact your wealth-building goals.

5 - The FOMO Bias – this one has really played out in the stock market in 2020 & 2021, with meme stocks sending retail investors into a frenzy chasing returns & investing through apps like Robinhood. And for the majority, they lost, and for those who also bought on margin, they lost big.

The fear of missing out is deeply entrenched in our psyches – we like to belong, be a part of the herd. This is further reinforced when we see media headlines telling us the property market is on fire, whipping investors into a frenzy, and often resulting in bubbles. But as your parents used to say, ‘if your friend tells you to jump off a bridge, would you do it?’ The crowds aren’t always right, and sometimes we get so caught up in trends, we lose sense of whether or not an investment makes sense.

In my area of work, the multifamily syndications, I would encourage investors to take the time to analyze the deals they’re considering, before jumping in with both feet. If you don’t understand how to properly assess a deal, ask for help from someone who has. There are some fantastic opportunities out there, but like any other type of investment, some carry a higher risk profile than others, and it’s important to be logical, not emotional, when making such decisions.

6 - Restraint Bias – This is one is familiar to many of us! This is akin to will power & self-discipline, and often plays out in situations around food, exercise, alcohol, studying. It’s basically our tendency to overestimate our ability to resist temptation, to control our impulsive behavior. This can play out in the investing world in a number of ways – we might panic sell a stock, after telling ourselves we are holding for over a year; we might overpay for a house, even after we had set clear goals & budgets for ourselves; we might sell an investment property, even if we had clearly planned to hold for a long period, because we worry that the market will continue to drop, and lose money prior to the cycle upturn.

Again, it’s important to sometimes get out of your own way, and test your ideas & strategies by talking with mentors or advisors. It’s an opportunity to be rational, not impulsive, in your decision-making, so that you don’t either buy or sell in conditions you might soon regret, all because you got caught up in the heat of the moment.

7 - And finally – the ‘I Don’t Have Any Biases’ Bias – It’s pretty unlikely that you’re that unicorn, to be honest. We all bring our belief sets, patterns, and behaviors to our investment decisions, and it’s really important to be conscious of that fact. Why? Because it’s important to know that we are bringing our own ‘story’ to the investment table, and if we can acknowledge this, it gives us a chance to be open to more opportunities, education, growth, and investment strategies. We like to tell ourselves we don’t have biases, but we all have them, and when it comes to money, if we refuse to accept that we have blind spots, it’s likely we will repeat the same financial mistakes.

I find it fascinating how we are often unaware that these biases play a role in our day-to-day lives, well beyond investing. We tend to default to ‘no,’ which I did, too, when I first heard of multifamily investing. I’m grateful that someone introduced me to them, and that I finally opened up to the idea, as it took my life in a different direction, which I hear is often the case with MF syndication investors. I’m grateful, too, for the mentors I’ve met along the way, who’ve greatly shaped our own retirement strategies, both in the real estate and stock market. My two cents, for those of you who are resistant, is to ask yourself why. There’s a wealth of good advice out there, and in my humble opinion, it’s always good to be open to new ideas, which might even lead to a more balanced, more successful investment strategy.