“Investor Psychology” Series: Beware Of These Deadly Mind Traps

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Perhaps the best thing about running GoodPlace is the amount of emails (and blog comments) that I get daily, giving me regular feedback on my work. Trust me, there’s nothing that destroys the soul as much as writing a blog which nobody gives a damn about, and with GoodPlace hitting double digit growth month after month this can only mean one thing…

My ego gets a little bigger every time I get a “thank you” or “GoodPlace rocks my socks” email, but of course, not every feedback is positive; and indeed, once upon a time some 14 people had told me that GoodPlace sucked. I guess I can’t make everyone happy, and as someone clever once told me, if I would try to please everybody then I would end up pleasing nobody.

Many readers have asked me if I could write more “done for you” kind of posts; i.e. instead of publishing guide on “how to spot a new growth area” I should instead run the analysis and list down exactly where the growth areas are. Unfortunately, these are the stuff that I don’t do, because as the old adage goes, give a man a fish, he’ll be hungry again in an hour. “Done for you” deals are the stuff that Gurus do, and the fact that GoodPlace will never publish Guru fodder is cast in stone.

Indeed, you’ll find that many of the stuff I write about are quite diverse although somewhat linked back to property, and this is done deliberately because if there’s one thing that I learned from observing successful property investors is that (1) they come from very diverse backgrounds with business experience in a variety of sectors outside property, and (2) they never learn their hustle from reading specialized books on property or, god forbid, seminars. I remembered when I first asked The Mentor about how to get started in property, he tossed me his collection of books by Seneca.

Your Greatest Property Investment Asset

“Managing your mind and emotions is everything,” The Mentor told me. “There’s no shortage of deals to make. Learning how to tell a good deal from the bad is easy, but you get blindsided by your own greed and intemperance. Property is a game for the stoic.

Since then, I’ve taken this advice to heart and started dumping my collection of Rich Papa Pokai Papa books for Marcus Aurelius, Seneca and Epictetus. And since this blog really is an extension of my daily experience in this game, you should be expecting more stuff on investor psychology, some hard property theory (usually involving lots of math) and, when I feel like ranting, Guru haterade. 😉 That said, if you’re looking for the Ultimate Get-Rich-In-Your-Underwear Guide To Five (5) Hot New Areas That Will Appreciate By 277% And Give You 12.7% Rental Yield By October 17, then you won’t find it here, sorry.

I hate to sound all new-agey on you, but really, your greatest asset is your mind, and specifically, an understanding on how to manage your own irrational exuberance when you’re dealing with multi-million dollar opportunities that will knock on your door even when you’re only mildly successful. Alas, this is something that those bargain bin “local author” books at MPH will never, ever teach you, simply because it’s not a sexy subject.

Mind Traps: You Are Your Own Worst Enemy

I get to work with lots of agents through the GoodLeads program (some 150+ of them at the last count), and the best ones often tell me this: buyers are ruled more by emotions than by reason. To me this is unfortunate, because buying and selling of property is far too important (with far and wide reaching consequences!) to be left to the whims and fancies of the heart.

Unlike The Mentor, I’m not going to ask you to read a bunch of books by Seneca and figure out how to be a stoic investor. Instead, in true GoodPlace tradition, I’m distilling the knowledge into some quick “hacks” which you can immediately use to your benefit. To start things off in this new series of blog posts on investor psychology, here are two common “mind traps” that people fall into when it comes to buying and selling property, and some practical ways on avoiding them:-

Mind Trap #1: Negativity Bias

Negativity Bias is the tendency to place more importance on negative traits than positive ones.

This is a common bias displayed by property buyers where negative events seem to be more prominent even in the presence of positive events.

Imagine this sub-sale property:-

  1. It’s in a good, gated and guarded neighbourhood
  2. Prices for properties in this area have appreciated by 30%, year on year
  3. It’s freehold
  4. It’s near a TNB high tension tower

Here you have four bits of information about this property: three positive and one negative. Negativity Bias makes you place more importance on the proximity of TNB high tension cables than on the other positive (and more important) traits. You might find that, for example, the property is placed at a safe distance from the tower. Alternatively, the fact that the prices have gone up mean that there’s demand in the sub sale market.

Research says that we place seven (7) times more importance on negative news or traits than on positive ones. When shopping for property, when you see something undesirable, ask yourself how important that negative trait is vis-a-vis what’s important to you.

Mind Trap #2: Omissions Bias

Omissions Bias is the tendency to judge harmful activity as worse than a less harmful inactivity.

This is a common bias displayed by property sellers.

Imagine you’re selling a property, and you know that it has got a piping problem. When the prospective buyer comes for a viewing, which will you choose to do?

  1. Tell her about the piping problem.
  2. Lie to her about the pipes.
  3. Say nothing and let her find that out later if she buys it.

The right thing to do, obviously, is #1. However, I don’t think I’m far off if I would asset that most people will choose option #3. Why? Because it doesn’t seem to be as bad as option #2.

Moral issues aside, knowingly sell someone a “faulty” property is illegal. Of course, you can plead ignorance, but this is all about understanding how your mind has tricked you to doing something wrong.

Knowing about the omissions bias will also help protect you if you’re a property buyer. The seller will almost never come clean with the property’s flaws, and to make things worse, you can never have a truly exhaustive list of things for your due diligence. So this is what you should do: ask, “are there flaws about this property that I should know about?”, and subtly let the seller know that it’s illegal to conceal such flaws if they exist.

About Khai Yin

When I am not writing for GoodPlace.my and helping my readers find properties though the DealMatcher service, I spend time doting on my three kids: Wenyi, Qinyi and Eian. My personal stuff, some published essays and contact details can be found at khaiyin.com

Comments

  1. Great piece today. Much appreciate it. Yes, lying on my bed reading this article. Sorry I won’t be joining you dancing.

    Your point on negativity bias. Aren’t this emotion a survival one to ward off many investment gimmicks in our life? With so many vultures out there trying to squeeze you to poverty or bankruptcy, this negativity bias is good and instinctive shield to fend off these bloodsuckers.

    Keep your articles coming. I certainly enjoying reading them.

  2. Well done khai Yin
    I wish more and more people get to read your blog and that is why I reposted your wonderful pieces on the hri.my website
    Keep it up and thank you

  3. Iza Abidin says:

    Hi Khai Yin,

    I am the editor for Property Hunter magazine. Property Hunter is East Malaysia’s leading property media network. Currently, we publish a monthly magazine, run an online property listing portal and organize 6 exhibitions in major cities across Sabah and Sarawak. In January next year, we will be launching the new face lift for our magazine. You can checkout our website, but the content is much different from our magazine as we have more featured articles there.

    I stumbled on your website by accident, and am very keen to feature your articles for our “Coffee Talk” section. Every month, we extract and publish some articles from another property blog. I hope you too can give us permission to extract some of your articles, and of course, we would mention your website in the section.

    Your simple and concise writing and sense of humor are definite winners to help make the magazine content a lot more lively.

    Please say YES 🙂

  4. Good article – I certainly can identify with the traits of negativity bias you highlighted ! Guilty!

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