“All my friends are buying investment properties and making money. How can I get in on that?”
I get questions like this a lot and not only from young people.
Soaring property prices are making people who don’t own property, or enough property, feel anxious.
Whether it’s missing out on potential opportunities in real estate, cryptocurrency or other speculative assets, many Australians are feeling like – what I term – relative losers. But feelings are deceptive. They are often based on vague and irrational beliefs and ideas, not reality.
For example, in the media and at barbeques, we don’t often hear about the thousands of people who have lost money from property and other investments.
Consider the case of GameStop. A lot has been said about the Reddit mob who took on the short-sellers and made a mint on Gamestop but next to nothing about the average punter who bought in at $325 and sold at $40. Similarly, there is comparatively less coverage of investors who bought Bitcoin at $60,000 and sold at $35,000.
This positive reporting bias, reinforced by social media algorithms that curate content based on articles read and internet search history, is feeding feelings of anxiety and desperation among those left on the side lines.
For those who are in on the action, it is contributing to confirmation bias and overconfidence.
Dangerously, relative losers tend to develop risk-seeking behaviour, according to behavioural science theories.
Prospect theory proposes that winners become risk adverse while losers (including theoretical ones) become risk seekers.
Similarly, sunk loss theory describes the tendency for people to continue pursuing an endeavour – be that an investment, career or romantic relationship – even when things don’t look promising because they don’t want time and money already invested to be wasted.
This type of risky behaviour is a state of mind that gradually creeps up on people without them realising it. After all, behavioural biases – like all biases – are automatic.
As if irrational risk-seeking behaviour isn’t enough for advisers to manage, they also have to combat confirmation bias and the overconfidence effect.
Confirmation bias is the human tendency to cherry-pick only the information that supports our existing beliefs.
It is difficult to overcome but with social media it’s even harder.
Digital media algorithms mean Google, Apple, friends and ‘influencers’ are sharing content designed to capture a person’s attention, based on their internet search history.
Since few people search up phrases like “how to lose money from property and bitcoin”, they’re unlikely to get both sides of the story.
By comparison, overconfidence is relatively easy to combat.
Overconfidence is commonly seen in those who have had minor success in a particular area, leading their subjective confidence in their own ability to become greater than their objective, actual performance.
It is a variant of optimism bias, which is frequently evident in over-trading.
Consider an amateur trader who coincidently started trading at the beginning of the cryptocurrency rise. If they got in early, they couldn’t really lose money because the trend was one way. It is easy to see how they could fall into the trap of thinking that they’re pretty good because their strategy worked.
In my experience, overconfidence can be combated by asking clients to explain their strategy without the help of a video or podcast. Then ask them what percentage of their total wealth they want to commit to this strategy. This usually provides a good reality check.
Overall, people are blind to their behavioural biases.
Only others can see them.
For clients keen to make speculative investments, a circuit breaker is needed to take their focus off risk-seeking behaviour.
The advice process is designed to do this by helping clients to understand their financial positon and set realistic goals, taking into consideration their ability and capacity to accept risk.
If all else fails, advisers should ask clients to explain Blockchain and how cryptocurrency fits in. That usually works.