For such a complex organ, the brain can be incredibly stupid at times. OK, it may do some pretty remarkable things (like making sure you’re breathing without having to think about it), but it can also play tricks on you. Let’s have a look how.
1. It thinks you’re being chased by a bear
Most of us will have heard of the fight or flight response: when our brain senses danger it will release hormones that prepare the body to either stay and fight the threat, or to run away to safety.
This is a psychological response that evolved in humans millions of years ago, when threats were generally terrifying animals that wanted to eat you. Nowadays, we might not get chased by wolves as much, but it appears that our brain didn’t get the memo.
The amygdala is the part of the brain that controls our stress responses, and when we get stressed it jumps into action to protect us. In doing that though, it blocks access to the pre-frontal cortex, the bit of our brain that helps us analyse situations and make rational decisions.
This part of our brain has barely evolved since prehistoric times, so whether a sabre-toothed tiger is after you or you’ve just read an alarming, clickbaity newspaper headline about an impending economic crash – our reaction is the same: we lose the ability to be rational.
Fear of missing out or FOMO can be a nightmare. Think back to lockdown when supermarket shelves were empty: in the face of Covid-19 people rushed to their local shops and bought everything. Why? Despite the government and shop owners saying there was no need to stock up or buy more than necessary, people saw their neighbours doing it and decided there was no way they were going to go without loo roll.
Now apply that to the property market: we’ve seen/are seeing people jumping into the market, looking to buy without any real need, aside from the fact they’re convinced they might miss out on an opportunity. I believe FOMO may be contributing to the unusual boom in the property market we’re currently seeing: in some places prices have more than doubled and there are more bidders per property than you would have expected to see before the pandemic.
If this sounds like you, stop and take a moment to think about whether what you’re doing is right for you, or whether you’ve merely seen a crowded bandwagon and decided to jump aboard.
3. Continuity Bias
Continuity bias is a subconscious belief that everything will continue going in the same way it has been. It can work in both directions: so when things are going well, you can find yourself believing they’ll continue going well. It also works in a downturn with people believing the depressed priced will continue.
This can lead to overconfidence or a complete lack of confidence. Its often what drives market sentiment, leading to the market over shooting and falling back too far. It can be very difficult to identify and requires careful, unemotional reflection.
At the moment property investors could be forgiven for believing they can do no wrong. Who needs to meticulously analyse a deal when the market is powering ahead like this right? Be careful. Overconfidence can quickly creep in and make you feel you don’t need any of the checks and balances you may have done as a novice investor.
I’ve been there myself. Before 2008 everything I touched seemed to turn to gold… until it didn’t. I started trusting my gut instinct over my due diligence when it came to deals, and when the music stopped I found myself deep in a hole that took me years to climb out of. Don’t make this mistake – always allow for the possibility you’re wrong and have a contingency plan in place.
4. Following the herd
As we’ve established, our brains are wired like we’re still living in caves. Back then we lived in tribes – there was safety in numbers and being alone meant you were more vulnerable to the aforementioned bear attacks. Nowadays this can play out as ‘herd mentality’. We want to fit in with the rest of the pack so they won’t kick us out of the tribe. We often do what they do, without really thinking about what is right for us.
This may sound like FOMO, but there’s a subtle different. Herd mentality is not about deprivation, or missing out. It’s about safety in numbers, about being influenced by your peers to adopt certain behaviours on an emotional basis, rather than a rational one. Next time you’re tempted to follow the herd, hang back for a bit to make sure they’re not all heading for a cliff.
Our brains really don’t like uncertainty. We like routine and knowing, more or less what is going to happen to us on a day-to-day basis. Uncertainty can trigger the amygdala (see point #1), which floods our system with cortisol and adrenaline, making us behave impulsively. We often react to the situation immediately in front of us without thinking it through.
I’ve seen it happen most recently with people trying to break into an overheating property market: they lose out on a couple of bids and start to panic, emotions are running high, they start to feel they will never get on the property ladder. This is where the outlandish bids can come from.
Not only do they overpay for the property, they also run the risk of ending up in negative equity when the market corrects, which almost always happens after a period of over exuberance. When they look back on things with a cooler head, they quickly realise they screwed up.
So next time you’re feeling stressed, or like you’re being forced into a decision, take a step back. Take time to reflect on the situation and remember no deal is much better than a bad deal – just make sure that your brain isn’t playing tricks on you!
I discuss this and similar matters in my weekly Property Investor Roundtable, its a free group coaching workshop where I cover tips, tactics and strategies for property investment. Learn more HERE