I’ve always been fascinated by human behaviour and, in particular, understanding what makes property buyers do the things they do. So when I joined forces with Chris Bates to launch a property podcast to help buyers make better decisions, it made sense to start by asking an expert. In our firs…firs…;">
I’ve always been fascinated by human behaviour and, in particular, understanding what makes property buyers do the things they do. So when I joined forces with Chris Bates to launch a property podcast to help buyers make better decisions, it made sense to start by asking an expert. In our first episode we interviewed Simon Russell, a behavioural scientist who specialises in the financial sector. We asked him to attend a property auction and tell us what he observed. I think even Simon was taken aback…
But before we get into that, a little background on why this is important. Simon explained to us that as much as we like to think we make rational decisions, the reality is that the subconscious, emotional part of our brain is actually a hell of a lot bigger than the rational part and therefore controls us most of the time.
“So, you look at the human brain, most of it is happening at subconscious levels and the links from those subconscious levels back up into the rational part are quite strong. So the subconscious part is really influencing the rational part whereas the links from the rational part down into the subconscious part are much weaker. It's a bit like the analogy of the elephant. The subconscious parts are like the elephant and the rational parts on top are like a human trying to ride that elephant.
“Now, we tend to think we're more the rider and the elephant, we don't see the elephant, this is the elephant in the auction if you like to coin a phrase, but this is what we're talking about. How does that elephant behave, can we understand more about that and how, maybe, the auction process is influencing the elephant because the elephant’s going to determine where we end up.”
We learnt about 12 behavioural biases that are likely to be played upon during an auction. Some would be as a result of deliberate strategies employed by the agent and/or auctioneer, others by virtue of the auction process itself. Read on and see how many you identify with.
1. Reciprocity effect
Ever seen a coffee cart or gelato van outside a house that’s about to go under the hammer? It’s not there purely for your enjoyment. The “elephant” feels an obligation to give something in return for a gift. Returning the obligation doesn’t have to be proportionate, so a bid in exchange for a cafe latte isn’t out of the question.
2. Scarcity effect
We value things then they are perceived to be scarce. In property this can be a good thing, however the sense of scarcity can be manufactured. Pay attention to the things the auctioneer might say about this “unique opportunity”. Auctioneers also work hard to create urgency throughout the auction and will get their gavel out and call “going once, going twice, going…” to make it sound like time is running out even when the reserve has not been met. This is a deliberate tactic designed to get you to bid!
Anchoring is a tactic some auctioneers use to draw our expectations towards the expected price. The auctioneer uses this to effectively get everyone on the same page. Have you ever gone to an auction where there is a crowd and the room is buzzing? If you intend to bid on that property, your anxiety tends to rise in accordance with the number of other people who also seem keen. You’re already probably thinking you have to pay more than you wanted to. And then the auctioneer suggests a figure that’s a bit higher again. Like it or not, you are going to be affected by that.
4. Loss Aversion
We fear loss because the pain of losing feels roughly twice the strength of the joy of winning. So when the auctioneer frames things in a way that emphasises the down-side, you are going to be influenced to bid. For instance, he/she could say “imagine how good you’ll feel this afternoon if you’re the highest bidder?” but a more powerful way to phrase that would be “do you want to admit to your friends that you let this property go for $1000?” Watch out for this one next time you’re at auction, it’s subtle.
5. Sunk cost
Once you have spent money, you should remove it from your decision making. Just because you’ve paid for a building & pest inspection and conveyancing doesn’t mean that you should bid over your limit. People do though.
6. Recency effect
We tend to be influenced by what is vivid and tangible and recent experiences have an impact. Of course, when it comes to real estate, this can swing both ways. In a booming market, we all assume that what happened at last week’s auctions will also happen this week and so we bid with gusto. Of course, the auctioneer will also remind us of these results! In a soft market we do the opposite, often not bidding because we believe prices will fall. Sort of a self-fulfilling prophecy, this one.
7. Social proof
If someone else thinks it, it must be true. We look around at the crowd, at other people bidding, and we feel reassured. “This is a good property”, we think, “it must be worth this amount of money because other people are bidding.” Of course, the opposite also happens and an auctioneer has dialogue that they will use in order to counteract the negative side of this bias.
Remember Monty Python’s famous quote? “You’re all individuals”, then a lone voice says; “I’m not”. We are influenced by others even if we think we aren’t. We like to be part of a group and if the group is buying property, we don’t want to be left behind.
9. Consistency effect
Once you take an action, you feel committed to that course of action. There are different levels of the effect, it increases with the more public the action is - people don’t want to appear foolish. So you can see how this will come into play once you make one bid. You are much more likely to place a second bid, even if it’s over your limit, rather than run the risk of appearing foolish.
10. Mental accounting
We apportion money into different buckets in our minds. When you hear the auctioneer talking about what a good investment the property is, they are tapping into this idea of mental accounting. We are willing to spend more if we had a windfall or if we can justify “the investment”. So by couching in terms of investment, even if you are planning to live in the property, the auctioneer is trying to leverage that bucket which we have more willingness to spend.
Some people think they are good at bidding at auction, in just the same way many people think they are good drivers. These type of people often have no idea of how bad they actually are and it’s magnified if they have previously “won” at auction. We tend to systematically learn from the things we do well but not so much from the things we got wrong. It’s a big risk for some people.
We can be vulnerable to media reports, history of growth & perception of continued growth so we might think we can’t lose and this might encourage us to pay too much. Maybe not in the current market, but in a booming market we see this “elephant” running rampant.
In the second episode of the podcast we interviewed Damien Cooley to find out the strategies he uses to influence buyers at auction. He was incredibly candid and I would recommend that every property buyer should listen before they bid at auction.
It’s important for property buyers to be aware of the ways in which their own mind can play tricks on them. However awareness is not enough! You’ll need to exercise self control and put in place specific strategies in order to overcome these biases. The most useful strategy, in my opinion, is to thoroughly research recent sales so you have a good understanding of market value. Then “pressure test” your upper limit BEFORE you register for the auction. It’s the second best chance you have. You’ll need to get in touch if you want to give yourself the best chance.