Originally published October 2022.
Success depends on recognising a good thing.
Do you indulge in magical thinking?
You probably don’t want to think so, but many people believe they can influence outcomes that are randomly determined.
Consider games of chance. Ever rolled some dice gently because you wanted a low number?
If you play the lottery, are you content to take randomly generated numbers? Or do you insist on picking your own?
Experiments have shown that once someone has picked their lottery ticket, they are reluctant to part with it even if they are offered an alternative with a higher chance of paying out.
“There is good reason to suspect that investment decision-making in real estate can be influenced by the illusion of control”
Similarly, many of us our more nervous as passengers in cars than as drivers. In general, people believe that accidents are considerably less likely to occur when they are driving than when they are a passenger.
Such behaviour is driven by the illusion of control – the tendency for people to exaggerate their ability to produce the desired outcome. This is a particular manifestation of people’s tendency to be overconfident.
What does this have to do with real estate investing?
Well, to minimise constraints to good thinking we need to beware of behavioural biases and there is good reason to suspect that investment decision-making in real estate can be influenced by the illusion of control.
Active asset management is an integral part of real estate investing. A key attribute of the asset class is the ability to add value through successful leasing strategies or the innovative repositioning of assets. Unlike many other asset classes, investors in real estate can influence investment outcomes.
