Behavioural finance explores the psychological factors that drives investment decision making. Recent research points to a connection between market fluctuations and investors’ behavioural biases. In this blog, our GM Investor Relationships, Matt McHardy dives deeper into how behavioural finance works, specifically in the commercial property market, and how it may influence your decision-making.
At PMG, we rely on solid, proven investment strategy backed by decades of experience. This experience enables our experts to be finely attuned to the nuances of not only financial markets and property, but also behavioural theory and how it affects investors’ decisions.
Behavioural finance theory emerged as a response to the traditional view of finance, which assumed that all investors were rational beings who made logical decisions based on perfect information. However, real-world financial markets often exhibit anomalies that defy this assumption, so behavioural finance looks at the specific psychological influences and biases that affect investor behaviour.
What shapes our biases?
One of the cornerstones of behavioural finance is the concept of loss aversion. It suggests that we feel the pain of losses more intensely than the pleasure of equivalent gains. This bias is driven by fear and can lead to irrational decisions, such as holding onto losing investments for too long in the hope of a rebound.
Of course, it’s more than just fear that drives our behaviour. There are other factors equally at play.
Some examples include:
Why is property investment such a ripe area for behavioural bias?
Research (Mahapatra et al, 2014) establishes the growing importance of behavioural influences on property investment decisions. While much of the conversation around behavioural finance has centred on stock market investing, property is a ripe area for bias, particularly in market downturns like we are seeing currently.
A few reasons for this include:
We have demonstrated that behavioural biases are built into many aspects of investing in real estate and prove a persistent threat to investors. However, the risk of biases influencing your investment decisions can be managed.
Watch the video below to learn how:
Disclaimer: The information in this blog is of a general nature and was current on 22 September. It is not intended to be regulated financial advice for the purpose of the Financial Markets Conduct Act 2013, and does not take your individual circumstances and financial situation into account. PMG does not provide financial advice. Please seek advice from a licenced financial advice provider before making any investment decisions.
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