When entering the world of property investment, the first rule is to fully understand the sector in which we are going to operate. Specifically, it is good to understand that we are about to enter the so-called “world of finance”, a segment that observes its own rules and through them allows the investor to obtain advantages or disadvantages with respect to the dedicated capital.
Real estate is for all intents and purposes a sub-division of finance, and therefore rightfully belongs to the economic markets, with its own rules and peculiarities.
Before deciding to make a real estate investment, therefore, it is good to understand that one of the disciplines that has the greatest impact on this sector is what is known as behavioural finance. In the next few lines we will try to understand in more detail what this is and, above all, how to use it to our advantage during a real estate transaction.
Behavioural finance: what it is, how it comes about, how it works
The most advanced economic theories have always been based on a few simple concepts, one of which is that of a person, or rather, the financial operator, as a party capable of making lucid and rational decisions aimed at increasing their assets, obtaining an advantage from a transaction, objectively assessing the pros and cons of each financial movement.
Come to think of it, this is how the economy itself works: a series of balances aimed at the mutual satisfaction of the interacting parties.
And yet, by the early 1950s, it was realised that this theory was incomplete. It failed to take into account a number of potential failures by traders engaged in their investments.
How was it possible that, based on a logic of pure objectivity, so many investors could potentially lose large amounts of capital through poor choices?
The “wrong choices” then became the focus of study for some economists of the time, who were able to isolate their characteristic traits and thus lay the foundations of behavioural finance, a discipline that highlights how the performance of markets can be influenced by the emotional choices of the persons operating within them, either positively or, above all, negatively.
Basic assumptions of behavioural finance
Let us imagine that we have to make some kind of investment. According to Behavioural Finance, the decisions we make may very well not be objective, but rather influenced by a number of other factors, whether social, psychological or financial.
In short, we are potentially subject to “Bias”, errors of a cognitive nature that limit our ability to make judgements. These obstacles can be Overconfidence with the object of the investment. The belief that one has all the information one needs to invest safely.
The lack of confidence in the object of the investment. Conversely, the feeling of never being sufficiently prepared to take the decisive step, i.e. investing.
Past experience. Often our past experiences influence our future choices more than they should. For example, an old successful investment may provide us with too much security, or the opposite, not reflecting that as the investment, sector and operation change, the outcomes may also change radically, compared to previous experiences.
This type of approach can also have a major impact on the outcome of the deal.
In the real estate sector, one of the most frequent “Biases” is the belief that investing in investments linked to one’s home country is cheaper than investing abroad.
This type of cognitive anomaly is called “Home Bias”.
Needless to say, in the real estate sector in particular, this bias can be highly disempowering, as well as being untrue.
How to use behavioural finance to your advantage in the real estate sector
The Remida Properties team has been active in the US real estate sector for several years, and in doing so works with hundreds of European investors who decide to make real estate transactions in the USA.
Remida’s approach involves a series of analyses that take into account the most advanced theories related to behavioural finance. Integrating this type of information into its working scheme has been fundamental to providing a better service for our investors.
For the guys at Remida Properties, the function of a real estate intermediary should be exactly that: to eliminate the possibility of errors and cognitive anomalies typical of behavioural finance when making a real estate investment.
Our constant research and information on the American real estate market is based on the desire to zero in on the so-called “Home Bias” and, conversely, to optimise clients’ investments through every investor’s best friend: diversification of the investment portfolio.