Originally published May 2023.

Many use experience and expertise interchangeably, but they are different. While experience comes from exposure to a particular field, expertise develops when that experience is refined, codified, and transformed into a predictive model that works.

Real estate investment managers need to be mindful of this distinction. They need to be able to present themselves to fund investors as experts and must avoid intuition leading them astray when making investment decisions.

Intuition, often associated with expertise, is not a magical power. Instead, it is an ability people have to spot similarities in situations they have previously experienced. Daniel Kahneman, a Nobel Prize-winning economist, describes intuition as “nothing more and nothing less than pattern recognition.”

People build intuition through experience, but there are circumstances when it can be misleading. For intuition to be trusted, Kahneman suggests a stable environment, a large sample size, and immediate and accurate feedback.

None of these apply to real estate investing. Real estate markets are complex adaptive systems in constant flux, making them difficult to predict. Most real estate investors make occasional, lumpy acquisitions, limiting the sample size. And feedback on an investment’s success or failure is often only available after many years.