Bad Behaviour

At some point in the future, AI may replace the heuristics and biases inherent in human decision making. Until then these form an important but often ignored part of market behaviour that doesn’t appear in traditional economics textbooks. A recent report by Fidelity International calls out some of the behavioural finance at play within the property industry, which is particularly affected due to its inefficiencies. These include: framing (oversimplified groupings or shortcuts, e.g. considering all assets within a sector to have the same risk), anchoring (evaluating one metric through reference to another, e.g. basing the current value on a historic value), loss aversion (assessing the damage of loss as more than the benefit of an equivalent gain, e.g. refusing to crystallise a loss and move on), home bias (favouring familiarity, e.g. weighting a portfolio to familiar assets, rather than those expected to perform best), and herding bias (following the crowd, e.g. buying in a hot market). Understanding these human failings gives us a stronger basis to understand real markets, rather than theoretical ones.