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Toledo Legal News - News Researcher says commercial real estate investors indeed often act on emotion


A new research piece authored by Matthew Richardson for Fidelity International reveals how commercial real estate investors, despite their best efforts to be rational, exhibit herd-like behavior and emotional reactions that cause the bubbles and crashes the sector experiences on a fairly regular basis.

Richardson found that the brain's ingrained biases and ways of approaching problems make people act irrationally, Bisnow Media reports.

Fidelity applied this notion to commercial real estate investment in the study, as the sector is prone to the kind of issues behavioral psychology highlights.

Richardson identifies five key areas of behavioral psychology that Fidelity argues feed into this pattern; they include:

Loss aversion,

Anchoring bias,

Herding bias,

Home bias, and

Framing bias.

Richardson explains loss aversion as the mindset that makes gamblers chase losses.

"Psychological experiments have shown that people feel the pain of a loss about twice as acutely as the pleasure of a gain," he writes. "As a result, people act irrationally when trying to avoid losses - the old phrase about throwing good money after bad (applies)."

The first of the biases - anchoring - results from the circumstance of an individual comparing one figure to another that he already has in his mind even though the figures may not actually be linked.

Richardson says if an investor has to use a metric to compare two properties, he should use yields rather than capital value, as yields have some reference to income.

"Focus on income return when making your investment decision, and ignore past economic or real estate performance as it might not happen again," he suggests.

Investors tend to herd together for fear of looking stupid, Richardson continues down the list.

"The wisdom of crowds can be powerful, but in investment sticking with the crowd can be a bad idea," he says. "'Social proof' is the technical term for doing the same thing as other people, often because you think they are in the know to avoid looking stupid."

Richardson suggests resisting the urge to act impulsively to counter the herd bias.

The home bias reflects an individual's preference to familiar things rather than the foreign or new.

Richardson suggests diving into foreign markets to "diversify across countries to avoid concentration in a single market."

And, finally, the framing bias results from humans' tendency to oversimplify difficult or complex questions.

"For example, when real estate investors are faced with the question: 'What is the true nature of this real estate investment?' they substitute it for: 'Which familiar asset class does this investment resemble, and what are the characteristics of that asset class?'," Richardson says.

How to counter this tendency? Richardson advises ignoring nearly everything apart from the income offered from the tenants in a building and the structure of the leases.

"If you want diversification, have a diverse range of tenants and leases expiring over a staggered period," he concludes.

KEITH ARNOLD, Daily Reporter Staff Writer

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