Ep 1 - Simon Russell | Who is really making the decisions when you bid at auction?

You're listening to the elephant in the room property podcast with the big things that never get talked about, actually get talked about. I'm Veronica Morgan, real estate agent, buyers agent and co-host of Foxill's location, location, location, Australia. And up Chris Bates, financial planner, Morgan's broker and wealth coach. And together we're going to uncover who's really making the decisions when you buy a property. Veronica will introduce Simon Russell in a moment and I can tell you that you'll want to listen to find out what he has to say about how a good auctioneer can influence buyers. So to give you that specific example, so when the auctioneer was saying, well, look if you don't bid, you know what you'll wake up tomorrow and you'll find somebody else has bought your house. Please stick around for this week's elephant rider boot camp and we have a cracking dumbbell of the week coming up. Before we get started, everything we talk about on this podcast is generally nature and should never be considered to be personal financial advice. If you're looking to get advice, please seek the help of a licensed financial advisor or buyer's agent. They will tailor and document their advice to your personal circumstances. Now let's get cracking. Simon, welcome. Well, thanks both. Thanks very much for having me today. Simon is the founder and director of Behavioral Finance Australia. He provides specialist behavioral finance training and consulting to clients in the financial services industry. With qualifications in psychology and investments and experience working with a broad range of professional investment teams, Simon is part psychologist and part investment professional. Tell us a bit more about that, Simon. This would be individuals making choices in terms of property in the case of what we're going to talk about today, in terms of their super, but also how sophisticated financial decision makers use these sort of decision making biases and affect how to fix markets, that sort of thing. So what tends to happen is in the research that these underlying decision making biases, there are ways that we make choices that often blindside us. We think we're doing something, but actually we end up doing something else. And that other thing sometimes is not actually our best interest. So that's pretty scary. So Simon, you don't normally focus on residential property investing, but recently you attended your first property auction in Melbourne. Now, I'm really interested to hear all about what you observed. I rocked up, I guess, at the point the auction was about to start. The first thing I noticed was pretty much just as I got there, a coffee truck that had been parked straight out the front of the house, then just the driver got in and drove off. So what I observed then was a whole lot of people who were coming out of the house all had in their hands take away coffee cups. So they'd been given, I presume, coffees from this coffee shop van thing that I presume had been put there by the auctioneer or paid for by the auctioneer or the vendor in some way. OK. And what was, why does that matter, I guess? What were you thinking when you saw that? Well, this is the thing. So all of these things should not matter. So in a rational world, you give me a cup of coffee. I should say thank you. That's nice of you. I felt like a cup of coffee shouldn't make no difference whatsoever to the bidding process. However, we are not quite as rational as we think. So what's happening here is what's called a reciprocity effect. OK. So the reciprocity effect is when you do something for somebody, they feel an obligation to do something back for you. Are you saying, though, that if basically if I go and they give me a free coffee, I'm more inclined to bid? You're more inclined to feel an obligation to do something in return. So that obligation, you can return that favour if you like in a number of different ways. And the thing about the research says that it doesn't have to be proportionate. It doesn't have to be the same thing. I don't feel I have to get you a coffee because you just got me a coffee. But I have this obligation that I feel, which might mean that I feel more obligation to bid or maybe I feel an obligation to bid a bit higher so that there are a range of things, I guess, in the context of property that I might sort of use. So a $5,000 extra bid versus a $4 coffee is highly disproportionate, of course, but that's the sort of thinking, I guess, behind why you'd put that coffee shop there. Can you just explain why do these things even matter in the first place? Why are we even discussing this? So I guess when you look at the human brain, you've got a layer on top of the human brain, which is our cortex, which is where the rational thinking takes place. It's a complicated thing, the human brain, but in simple terms, the rational stuff that sits on the top and underneath that, you've got all of the subconscious parts, the brain that deals with emotions and the like. And that actually is the emotional part, the sort of subconscious part is the majority. 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, all right. So 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 their elephant, okay. So if you're trying to ride a bull elephant, for example, well, the bull elephant is going to do what the bull elephant wants to do, all right. You can try and pull the reins if you like, and to some extent you are going to influence the elephant. But if the elephant has a strong view about what it wants to do, that's really what you're going to be doing, okay. 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. The elephant behave. Can we understand more about that, and how maybe the auction process is influenced in the elephant, because the elephant's going to determine where we end up. So as the coffee actually, you know, I guess encouraging the elephant to come out, really, it's getting people in a bit of a mood to bid its hype and up the elephant, probably, maybe actually. Well, there's a stimulant effect, if that's what you mean, in the cafe, you're probably right. Maybe you're waking some people up on us that day morning, but I guess it's that reciprocity effect in this case that I'm referring to, where the elephant now wants to bid, not because I've decided it's a good idea, but because the elephant feels an obligation to reciprocate this coffee effect. This is quite frightening, because we've just touched so far on the first bias. Because if the elephant truly is a dominant, as you're saying it is, and I have no reason to doubt you because you are the scientist, and I'm not. So the elephant is dominating us. Does awareness help? Very good question, so as a general rule, I think awareness is a good first step, but awareness by itself often is not sufficient. When I work with professional investors, for example, often you'd say, have a checklist of things so that you can go through and make sure at the time that you're making a decision, you're starting to think about this sort of stuff, and maybe you go, well, you know what, I felt like a coffee, but I'm not going to have the coffee because I don't want to be subject to this reciprocity effect, for example. So you've actually got to train the elephant, I guess, you've actually got to be aware and know that these things are big beasts that we've got to actually consciously understand for us to be able to behave kind of emotionally, or at least, you know, I guess, make more informed decisions and not be, I guess, subject to the negatives of how this could affect you. All right, let's get back to the story. Okay, so the truck's just gone. The auctioneer is sort of getting everybody together and he's about to start the process. He's saying, words, the effect of, look, it's not very often you get a property such as this one and a location here, which is backing, butting a park at the back of it, fantastic, unique opportunity, very rare, blah, blah, blah, blah. Okay, now the interesting thing about this is that he's trying to create what's called a scarcity effect. It's quite difficult to get this sort of property, we value things more when things are perceived to be scarce, and you can, to some extent, manufacture this. So this is the, I mean, the concept here is you go to a supermarket, there's tins of baked beans there, there's a thousand tins, well, there's no scarcity, until they put a sign there saying, limit five tins per person, and then you go, my goodness, I've got to get those five tins, now it starts to seem like there's a bit of scarcity. So how can you manufacture scarcity? Now he was doing it by trying to make sure that we understood that this was a unique opportunity. It's a very virtue of being at an auction on site, there is only one property available for auction then and there, anyway, so that in itself is scarcity, however, how's the difference, do you think, I mean, you didn't go to an auction that was in rooms, when you go in rooms, there's a list, it could be up to 10 properties being auctioned in a night for arguments, say, versus the one on site, do you think that would play out any differently? I would suspect so, because then it does, it does seem like you've got a range of options, if I don't get this one, I can get that one and the one after it, so maybe there's 10 rather than this very concentrated effect on one property, which yeah, that's right, it's positioning it as a market of one, and if you miss this, then that's it, your opportunity has gone, but interestingly, I mean, he used this sort of concept a couple of times during the auction, I think it's embedded in the auction process to some extent. So for example, you're beating in that the property isn't even on the market, all right, so there's this scarcity, well, you can bid if you like, but you can't have it, so it's not available, and then he's also, as we get further through the auction sort of saying, all right, first, second, third, all right, time's running out, suddenly there's all this urgency about my opportunities are going, so there's a few instances where this whole idea of it's scarce, it's running out, other people might want it, might be lost. That sense of urgency, I've seen that time and time again, an auction is they don't want to call it on the market, now this is terminology, a lot of buyers expect to hear, okay, we've hit the reserve, we're on the market now, now it's for keeps, you know, go for it, guys, And auctiones, they resist. Because the reality is they're trying to create the idea that it's actually going to be sold at any price And I what I love watching auctions, particularly when I'm not bidding because you can see it in the auctioneer's Domenna, I can see it in their their body language just in the whole presence with them when they've hit reserve versus when they're Bluffing, but that's because I observe so many of them and you can see it's a very clear strategy in order to create this sense of This sense of scarcity and I guess you know when we look at the property market the the negative of scarcity is as we become impatient And we want to a kind make sure that we get it because we don't think there's going to be another opportunity kind of coming up But generally it's having a bias towards something that's scarce is is generally a good decision making rule So there's a lot of these things have evolved over millions of years and if something's scarce Try and find it. It's probably valuable. I mean that's generally good But unfortunately with some of these biases if if they're used and manipulated and sometimes apply out of context Then they can have negative implications in real estate terms scarcity is something that we look for certainly from an investment point of view You know you actually want property that is scarce because that's more likely to be a good capital growth performer So you know there are there's certain value in that but the idea I think in the last say five years And we've seen a boom in both Sydney and Melbourne and that's when you've seen phomo kicking big time I mean that that's really what this is about isn't it? This is the idea of I don't want to miss out on the bandwagon that everybody else is on and I think When you've got that heightened sense of you know keeping up with the Joneses or Big idea that I'm missing out on something that everyone else is getting then that's going to create an artificial sense of scarcity Right. Yeah, and that's the problem I think where it's artificial where it's manufactured where it's not actually real scarcity and that's that's where some of these sort of Psychology studies can generate can artificially manipulate people to perceive scarcity and that's when you start to see this bias coming out So we've got the first one down there, which was you know reciprocity, and then we had you know the second one Chouville saying that yeah, that's a very typical word 16 syllables in that one But then the next one is scarcity and so what's the what's the the next one you kind of you know You noticed that the the auction playing out. Yeah, so it's a bear in mind I'm still pretty early stage of this auction. He's just sort of introduced it to To this stage and the next one really is trying to get the bidding going and What he then said was who will get us going, you know sort of the drill yet? Yeah, by the way properties in this area often going for two million dollars Now, he didn't make reference to a particular property that might go for two million He didn't say this property should be worth two million He didn't tell you what the rental you didn't give any sort of basis for where this two million dollar numbers come from Okay, but but the fact that he's thrown in the number two million into the context of the auction Correct what's called an anchor do you think that was a hint? I think it was a deliberate ploy. I think he did it very very well So he knows the power of anchors. So so just to give some context So an anchor is a number that is going to draw our expectations and draw our estimates towards it So to give you a little bit of a sense of the of the research A famous study by Daniel Kahneman who won the Nobel Prize in economics Two from memory you want to want to take from your professor there One of several now, by the way, I should say but one of the studies that he is reported to say Stay with a spin a pinwheel Round that round around the pinwheel goes so you see that a pinwheel is a random effectively a random number generator It pops up with a number. Okay, it's 75 or whatever the number is and then you're asked a question Which should be completely irrelevant? How many African nations are there in the United Nations? And what what the study shows is that the answer to that question then is highly correlated with the number spun on the pinwheel All right, which there's no connection because it was a random number. That's right And it's obvious that there's no connection people see that spinning pinwheel For example, so when he said two million dollars that was him saying look we want to be batting around two million dollars here We're not going to you know get there straight away We're not going to start the bidding at two million dollars But you guys should be thinking about two million dollars because that's what's going to get this property Yeah, well the funny thing is I mean almost you can just throw a number out there So I could sort of coffin splatter and go to point five million dollars And then you've heard me say two point five million dollars That's likely to impact the way you then make decisions because some of these studies if it's a pinwheel If it's repeating a last three digits of a phone number or your social security number all these sort of things are Not really contextually relevant at all, but he's found the neat way to introduce it into the conversation So it's going to play a role Which is clever because if he doesn't do that then we are all going to come to this auction with our own anchors And our anchor might be what I just saw my property for something that's around the corner I was bidding on yesterday all right and he doesn't know what those are they could be high they could be low They could be anything so he's very smart from his perspective to put in something that's going to be nice and high Which tended to be a bit higher than what the property is all for that's going to draw our estimates towards that I can tell you that There would have been quite a lot of background work leading up to that auction which assisted that because what a selling agent would do They'll start quoting a figure now. There's legislation in place in all states that the governs how they quote that figure and then the agents Could identify who's going to be a serious buyer or who's not right and one of the things that they'll do a good agent Will then start introducing a higher figure for them to consider and it might be dialogues such as You know we're quoting X but the vendor would love to see why or We're quoting well the price card is X but nobody is yet talking why but they've entered Y into the conversation Despite the fact that they're continuing to quote X and so then the buyers go along to the auction and probably what's been mentioned there is Y Well, maybe even a tad higher than why all designed a ratchet buyers expectations up What are some ways to I guess note you know see these anchors and then actually deal with them and actually say well You know these are just anchors getting thrown at us. How could we actually try to win that battle? I guess yeah, I mean I think the first thing to realize is that they have a really strong impact on you So I've had groups where I have deliberately manipulated the situation So I have half of people I'll give them a high anchor half the people I'll give them a low anchor and then I'll ask them an estimate of something and In one case I had a room full of these were investment consultants I had a room for investment consultants I said how many people are aware that I've given you an anchor and I'm trying to influence your decision and I had every single Hand in the room was raised all right everybody was aware what I was doing Okay, and then I aggregated up all their responses added on my lap and got an average and there was about a 50% difference between their different answers, so awareness in this case is not sufficient So you're saying that those who you'd anchored a higher figure had a higher answer yeah, and it was really obvious Oh 50% differential so the huge difference So anchors are very very powerful and there's a study of real estate agents Where they've been shown to work in the professional context of of valuing property where you've got the vendors Expectation or not having a vendor's expectation does it make a difference in the agent We'll say no it doesn't in this in this particular study, but then it's obviously it does have an impact That's fascinating because that then you roll that back to even before they start quoting what they quote Their their own biases can come into play so it's this is really do you know dig deep in this industry and it's it's everywhere this anchoring And I think that's why it's clever for the auction here in this case to throw in an anchor that we're all now exposed to because you haven't seen all those different anchors But to come back to your question, Chris, so what can you do? I think when you see one of these anchors and you recognize it's an anchor It's gonna have a strong impact on me try and counter it with my own anchor that actually has a basis in The reality and the substance of this transaction So you're saying to do due diligence to figure out do enough research where you can create your own anchor rather than You know going by whatever on throwing these numbers around you I guess yeah, so so if I hear someone say you know what probably is in this house in this area you're gonna go for two million dollars I would go you know what that's an anchor. I'm gonna be impacted by that What's my alternative anchor? We know what I've done my valuation and I can work with 1.6 the house around the corner that was worth 1.5 So I've got to create my own anchors in my mind to overcome this other anchor All right, I've got to be ready to do that because if I don't do it that anchor is gonna impact me whether I like it or not with our clients You know we do very very rigorous price research and a whole dry run if you like of the auction before we get to auction So we sort of try to eliminate the impact of all these biases, but my own reaction when I hear You know, I guess one example is a vendor bid as well another another way of doing his anchoring is where there is no bidding And so they throw in a vendor bid now a lot of a lot of auction is don't like using these and in in New South Wales For instance, they can only use one anyway, and I think in Victoria You can actually have multiple vendor bints what it's designed to do is actually open the door So then people will come in and bid over it So it's meant to sort of show that the vendors realistic in their pricing It's a slightly different to the other anchoring where you're trying to raise people's expectations This is actually where you're trying to show that the vendors quite realistic and there's you know There's a there's a property to be sold here today, but when you don't get that vendor bid You know, there's no guidance, you know, so that the auction he was using that as an anchoring tool I don't think it's as effective as what you've just said, but the thing too is what I've often myself I've Reactive when a vendor bids being being put out and it's high and I've got oh you got to be joking I wanted to know whether a lot of other buyers think that because I've done the research I know clearly what that property should be selling for so I'm reacting from a different headspace and I've never really thought of it That way yeah, it is interesting because when you're going through the auction you're going to get multiple different anchors So he started the auction with this two million then the bidding I forget where it started maybe 1.5 maybe So he now he's got a problem of it starts at 1.5. I think there was a vendor bid at 1.5 1.6 out of that and then it was a bit of delay. Anyway, as bids come through, you've got low anchors. So he doesn't want these low anchors to then be anchoring low people's expectations. So what he did in this case is after there were a few bids, he then repeated the $2 million one again. So he's re-anchored us back up there. In just in case you thought this was worth 1.6, no, no, no, no, houses in this area go for $2 million. So he did it very well. So the next one I saw when I saw several instances about is around a loss of version. And the concept of loss of version is that as we think and feel and respond to losses, we do so roughly about twice as strongly as we do for the equivalent gains. So to give you an example, if you're walking down the street, you find $50. Fantastic. You put the $50 in your wallet, you feel good. Versus if you're walking down the street and you open up your win-blows, $50 flies away, it goes down a drain. The feeling of negative of regret of the anxiety of associated with losing the $50 is roughly about twice as powerful as the benefit of having got the $50. So you're saying that the pain or the fear of the pain of losing out on the property is greater than the fear of the pain of overpaying? Well, both of those two things you've couched as being fear of pain of both as negatives. So I would say, to give you that specific example, so when the auctioneer was saying, well, look, if you don't bid now, it's below reserve. If you don't bid now, you're going to lose the opportunity to negotiate. Now, he framed it as, this is something you're going to lose. If you don't bid now, you lose the opportunity. Now, he could have said, if you do bid now, then you're going to get the opportunity to negotiate. But he's quite cleverly changed the way he said that sentence. He could have been either again or a loss, but he has phrased it as a loss, because he knows that that type of decision-making is more powerful than the gained version. And where the loss is that leading into someone feeling regret, or is that someone feeling, I guess, just pain knowing that they've lost out and they've missed an opportunity? Yeah, so you can understand loss of version. There's a bit of discussion in the literature around, is it really regret or is there something else? I think regret is part of the explanation of something going down. So we're sort of thinking about the future and thinking about negative possibilities in the future. And they are more powerful on us, on our decisions than positive versions. I think that's a general principle. Was there any other examples of loss of version? Yeah, he had a couple of other ones. So all sort of thinking about the power of what's been lost or could be lost. So one time he said, look, if you don't bid, you know what you'll wake up tomorrow and you'll find somebody else has bought your house. Ooh. Ooh. That's a motive. Yeah, so you're right. I think he's trying to generate some emotion, but he's couching it is this is your house and now you've lost it. It's not like you'll wake up in the morning and you'll have bought a nice house. You didn't say that. He said, no, no, you're working up and she's someone else who's living in your house. They bought it today. Yeah, I mean, I guess it's how much are people invested in this already, you know? And they've already gone through the whole. There's some people have already decided what furniture they're going to get for the house and they haven't even bought the house yet. So I mean, the fear of losing that. I mean, we are wearing worse enemy in terms of investing so much into this, this getting this decision right that we can't afford to lose it. Yeah, yeah, that's right. And it sort of touches on sort of the consistency in some cost effect which will get to in a second. But I think you're right, broadly it is around all this, this energy that we might lose. What's going to, what are the downsides? So he's, and thinking about how, how as an auctioneer, can I create this these negative versions of the world that are going to influence people? So, and you're right, I think you've, they're probably things I didn't observe at the auction that you've touched on that people have got their plans and they've been, I didn't even go in the house to be honest. I don't know what house, house look like. But he said, you lose the right to negotiate, someone else bought your house. If you buy this house, this will guarantee your future, which I thought, oh geez, that's kind of guaranteeing my future, I said to my son, don't worry. Any problems you thought, he hasn't been through school yet, but don't worry, if we buy this house, your future is guaranteed. So he's taking away any anxiety about the future and saying, don't worry. So again, it's not about the upside, it's about taking away the downs, the guarantee that bad things won't happen to you. Don't worry, that's all being guaranteed. - I mean, that's a huge one, I mean, if you've gone to an auction, you've missed, you know, out at one auction, you've already experienced loss of version, you've already gone through that pain, you've jumped in the car after missing out, you know, you've potentially had the argument with the girlfriend or the husband or the wife and you know, and you've, or, you know, you've just sitting there and you're really frustrated, you don't think it's gonna come up again and you've missed out on that scarcity opportunity. I mean, Veronica, you must say that every time. - I've written about this, you know, I've called this the most vulnerable buyer, because the person that just missed out is feeling that lost keenly and I have observed this. And I've seen so many people go and buy the very next auction, and the very next property they go to an auction and they buy it, with often zero due diligence and zero thought, and sometimes it's the first time they even saw it, was at the auction. There was one couple that I saw them at an auction, it was one of those auctions that they should have bought it, but the other buyer just bid in a way that scared them off. And because I was purely observing, I was able to really watch and think, oh my God, there was so many points at which they could have interjected and could have changed things and actually should have bought that property. And I don't normally ambulance chase, but I did go after this guy afterwards, and said, look, I'm so sorry to see you lost that. There are ways that you could have been differently. And if you need some help in the future, please call me. Now, he did talk to me and he talked to me about a property that was coming up across the road the very next week. And I knew that property, and I've been through it, and I knew it was not suitable for a young couple with a baby, which is what they were. And I talked to them about that. And when I spoke to them the day before the auction, I spoke to his wife and she said, we will not be buying that property. And even if we do go, we won't bid over X. And I thought, even saying, we're not going to buy it, but even if we do, we won't bid over X. I thought, you're going to be buying that. And sure enough, they did. But they were at a wedding the night before. And I just said, don't drink, then. Do not turn up, hung over. Your guard will be down. And I know the agents, you'll know your feet to the floor, you'll abort that house. And they did. So that's actually one part of that that really resonates with me is the hangover peat. And I'm not suggesting, I don't know how many people have a hangover when they're bidding at auctions. I hate to think. But it actually does take mental energy and effort to overcome some of these sorts of things. So generally, they are designed as being shortcuts that make stuff simple for us because it takes a lot of energy to run your brain. Your brain takes up 2% of your body, but uses 20% of your energy. These are simple mental shortcuts. So you want to be on your guard, as you said, to use your words. But having a good night's sleep, having getting good exercise, all those sorts of things tend to mean that you're in a better position to overcome decision-making biases than if you're not. I mean, one thing that fascinated me, we're talking about there, Veronica, are in terms of doing no due diligence. And as a broker, I taught clients through that decision and sometimes clients say, well, I don't really want to do the building and pest inspection because it's $500. And I'm like, no, definitely do the building and pest inspection because it's $500 to potentially save you hundreds of thousands of dollars through making a wrong decision. And I think that fundamentally touches on some cost bias. As soon as we start to invest money into the property, we start not wanting to make that money be lost or just lose out for that. Yeah, so the idea of a sunk cost is once you've spent something, you should disregard it from your decision-making. You cannot come back and get that money back. It's gone. You should forget about it. It's not part of decisions which should be then forward-looking about what the amount I'm going to pay for the property and the benefits I'm going to get for it. So the idea of a sunk cost is that we are influenced. And it links into a concept of sort of consistency, which is the idea that after I've done something or said something or behaved in a certain way, I feel thereafter that I should behave in a way that's consistent with that. People don't like to see themselves as being inconsistent, capricious in the way that they live their lives. And they don't like others to see them as being capricious and inconsistent as well. So there's a whole bunch of sort of consistency effects in an auction process itself. And the key one, of course, is bidding. So after I've just bid $1.5 million, I've expressed my interest in buying this property to then not go on and buy the property there after. For example, is an inconsistent act. I've just told you that I'm interested. And now look, I'm not, I'm pulling out. And that's obviously auctions are designed to enhance that effect. - And so when you talk about we want to keep on behaving like we have been behaving, is that because of a social pressure? Is that because of we want to just keep on, you know, we don't want to be telling all our friends, we've got this amazing house that we want to buy on Saturday and we're all excited and, you know, we're going to, you know, can't wait to buy it. And you're showing, sending pictures to all your friends. The last thing you want to do is get on the first of the Friday and go, you know, what we've changed our mind. And so, you know, how do you think that social pressure and, you know, affects this? And did you notice that on the day? - Well, when you look at the reach, so taking the research first, so there are different levels of the strength of this consistency effect. So if I've just thought something. then well it's quite easy for me to get out of that because I haven't told anyone, did I really think it all was I think about that and there's all these excuses we can tell ourselves, all right, versus if I've actually written something down, now it's there in black and white, all right, I haven't shared with anyone now but I can't deny that I thought it because I've written it down, versus if I've then shared that with somebody else. Gosh, now it's hard for me to get out of it because I've just told someone and they're going to hold me accountable for it potentially. So there are all these sort of different cascades and if I've acted on it as well, if I've just bought your pest report for example, how silly do I now look that I've just wasted my $500 or what, geez now I really have to act to make it make it short, I didn't waste my money because that will maybe look silly for example. So yes, I think it does link into the social aspects. It's why they have like weight loss clubs and stuff like that too, isn't it? It's basically making people accountable. You've said you're going to do something or a fitness club, you said you're going to do it. Now it's out there public, you have to follow through on what you've said you're going to do. So the auction is an interesting forum for that sort of self-applied pressure, isn't it? Yeah, I mean, you can use this stuff positively as well. So you'll see sometimes where people want to behave in a certain way, how I want to save, I want to join the health club or whatever. Well, let me set up a system that's going to force me to do it because if I don't join the health club, I'm going to have a system that's going to make a donation to a political party that I don't like, for example. So I don't want to behave in a way that's going to create that. So how am I creating a sort of a consistency effect that's going to help me to act in that way in the future? So somebody who studied this might do that, but most of us wouldn't even consider such an interesting mechanism to get us to behave in a way that actually helps us. Yeah, but that's the power of this sort of stuff. When you rock up to the auction, there are things in your past that are impacting the way you're going to behave in the future, that you might think aren't. So it's sort of a rich ecosystem, I guess, of our decision-making that we need to be aware of. Yeah, I mean, the one thing that I always notice in markets and investing and in life generally, we're kind of sheep as humans, and we just follow the crowd, and if everyone else is doing it, then we don't need to do our own due diligence. If everyone else is buying a property, we should buy a property, you know? It's interesting because you say we're like sheep, but you know what, I'm not a sheep, are you a sheep? I mean, none of us feels like individually we are sheep. It's somewhat of an insulting term to say someone's a sheep, but collectively that's, I guess, what the research shows is that we do tend to be influenced quite heavily by other people, but it doesn't feel that way to us. Now, in the case of property, there's a whole lot that you see at an auction. I mean, I'm standing there with 50 other people, so suddenly there's a whole lot of social influence. We're talking offline about the fact that most people don't like public speaking, and yet we're putting someone in a situation where they have to speak in front of a whole crowd of strangers and do something that might make them seem pretty silly if they bid too much, for example, or did they pull out when they should have done something else? So there's quite an aspect of social pressure at the auction itself, but I think perhaps what you're alluding to is that generally speaking, what's the value of property generally? Well, it's based on a comparison of what other properties have sold for, which is pretty much what people agree. So fundamentally, it is all sort of social driven, isn't it? So there's so much in this bit. I mean, it's keeping up with the Joneses is one aspect to you, but also I've actually been at auctions and I've heard people say things that fits into this, right? So I've actually heard people say, well, it must be worth that because that guy over there just bid it. And I'm like, well, what on earth makes you think they've got any clearer idea on what the properties were? Then you do. I mean, that's just nuts. And another thing I've heard people say at auction is, well, they must have done a building in pest inspections, so I don't need to. And you just think, wow, imagine putting that much faith into A, whether they have or haven't, they could be thinking the same thing as you for starters. But if they did do it, have they read it? Have they spoken to the inspector? Have they actually understood it anyway? Or have they then put brought in another bias that actually calls them to disrespect or disregard the what the report said because they thought what doesn't matter, property is going to go up anyway and it doesn't really matter if it's got massive rising damp problems. And so there's this idea at play that you are about to part with millions of dollars in some cases, even it's just hundreds of thousands. There's a lot of money. And yet you are just going to abdicate your responsibility for due diligence because you're going to believe that somebody else actually done theirs and you're going, you're riding on the back of that and these people aren't even people you know, they're you're complete strangers. Yeah, I mean, I guess it's one thing that kind of makes me laugh is that people will spend weeks and months getting excited about a holiday and booking the cheapest flights and researching the hotel to the answer agree, reading 100 reviews and doing everything they possibly can to make this holiday the most amazing experience. But when they come to their property decision, you know, they speak to their guy at the pub, their friends friend or etc and they rush out and they want to make that decision extremely fast just to get it done. Well, I saw a few instances of it. So the auctioneer, I think in the case I went to was very clever in using some of this sort of stuff to his advantage or trying to overcome it where it was working perhaps against his advantage. So for example, we got to a point where I think we had an opening bit of 1.5 then a vendor bit of 1.6 and then it was all quiet. All right, so the problem the auctioneer's got at this point is that the social influence is working against him. All right, there's 50 people here. Nobody is bidding, wow, it seems like everyone thinks this property isn't worth buying. All right, that's what the social influence would say. So he has to overcome that in this case. So he did, I thought it was quite a clever trick. He was there by way of context. He had about maybe three or so assistance who were helping him on the day. And so he's countering this idea that we've all decided that the property isn't worth buying with the idea that actually you know what, the bidding is not reflective of what everybody thinks. And he did that by saying, look, if nobody bids here, well, we still know the property's worth a lot because I know that, Bob knows that, soon knows that, Mary knows that and he sort of listed off all the people, hey, look, no, there's social influence saying here that the property's worth a lot is just not reflected in the bids. So he sort of had to try and overcome it. And that I think was a good case of what can you do against when this stuff is not working with you. And he did it very, very well. And he had it a couple of other cases as well where he's tried to use social influence. And he did it sort of an off the cuff way in a couple of cases. When he said, I'll look after you, when the auction, you can go down to the local pub and you can celebrate with your mates. For example, so he's creating, I guess, that image in our heads of the social sort of benefit of my mates congratulating me about my wise purchase. But he also did other things that were quite subtle. So when they were down to a couple of bidders and he was looking at one of the bidders going, well, do you want another 5,000 or another 5,000? So he's looking at this person. He's smiling and nodding at the same time. So, I mean, this links into, we've got these things called mirror neurons. So when we see somebody doing something, it's almost as if we are doing it ourselves. This is how we learn as a social animal. We have this mirror neuron, these mirror neurons that mean when I see someone smiling and nodding, I sort of am inside smiling and nodding as well. So he's almost greasing the wheels for me to smile and nod at his 5,000 dollar suggestion by smiling and nodding at me. So he did it very, very well. When we were talking about anchoring, what occurred to me was that auctioneers anchor in another way, not just putting out there a figure that people might need to be thinking about, but actually the actual size of the bids. So early on in the auction, they'll be saying, right, well, I think the next bid should be $50,000. And so, and I watch people and they're like, okay, then there's 50. I mean, it's like you don't, there's no rule that says you have to bid 50. You could bid 63 or you could bid 25. They can reject you bid. Somebody else may bid it, but there's actually no rule that you have to follow these instructions. And yet, so many people do follow the instruction and they'll get smaller and smaller. It's all this nonverbal stuff in that too, right? Because it's giving clues that you're getting closer and closer being able to purchase the property. And as the bids get smaller and smaller, I mean, what's going on in a buyer's head then? Well, I think you'll be right in what you're saying in that there's no rules here. So you look at the sort of the rational world and this is sort of where economics started 20, well, more than 20 years ago, it was a sort of an economic theme was how we all rack rationally. And in a rational world, you would make whatever bid increment you wanted. You would start wherever you wanted. Why would I bother making a bid below the reserve when I can't possibly buy it? None of this sort of stuff would take place, all right? So in an uncertain world where there aren't defined rules and aren't defined bid increments or valuations, that sort of stuff, then we do look for simple shortcuts. Ways of cutting through that complexity. And what other people do, what other people say, what the suggestions put to me, all these things are powerful influences in how I'm going to respond. So yes, we're going to be influenced by all those sorts of suggestions. And really, we've got it takes a lot of mental effort to overcome them in many cases and say, you know what, I'm not going to put another $50,000 on. I think $27,451.27 is my limit, and I'm going to stick to whatever it is. So would you say that the auctioneer up there was kind of like a circus leader more like it. You've got all these elephants running around and all acting in strange ways. And he's up there, you know, in front, and he knows what's going to make all these elephants get all excited etc. So I mean, fundamentally, that's what an auction really is, isn't it? I mean, one thing I've noticed at a few auctions is kind of the recency effect, which is, you know, we kind of behave on what the news is at the time. And, you know, I've had, you know, real estate agents send me research what's happening in the market, like infrastructure projects and, you know, big spending and the property market's gone up 30% last year and all these kind of recent positive news. Do you think that that plays out and did you actually notice any of that on the day? Well, in one case, so generally I would say, yes, we tend to, when you look at the research, we tend to be influenced by what is vivid, what is imaginable, what is tangible, and our recent experiences tend to be all those things. I can understand and experience and I can remember what's happened in the last five years versus, you know what, I don't remember living through the Great Depression in the 1920s. I don't know how old you are, but you don't look like you're old enough to remember that one. So, yes, I can read about it. Of course, yes, I can see it in the data stream, if I go back far enough, but it's not going to influence me nearly as much as the most recent experience. Now, in the case of the auction I attended, the auctioneer did make a reference to this sort of recent effect. I mean, he said at one point, this property will go up, and there was a bit of a pause and I thought, "Oh geez, I mean, if he's going to write a written guarantee, I'm happy to buy this property. I'll sell it back to him in ten years if it's gone down." But then he caveated and said, "This property will go up based on other properties, recent experience of other properties in this area." So, he's trying to leverage that effect. He hasn't said, "You know, what over a hundred-year period? Sometimes it goes up, sometimes it goes down." That wasn't what he said. So, I guess, trying to create that sense of recency, in this case, it's a positive effect, of course. Humans will generally think that, you know, the last 12 months of returns are going to be similar to what the next 12 months of returns are going to be. And it just defies common logic, you know, if something is going up, it means that it's probably going to go slower in the future. If it's gone slower, it's more likely to get speed up. And, you know, it's just the odds of it. But, unfortunately, you know, they love to play on this, you know, recent returns. And that's what you should expect, is the same returns longer term. So, when the bidding slowed down though, how did the auctioneer get more bids and actually bring it to a sale? How did it get more bids? So, connecting with the mental accountings, I don't mean just introduce that concept. So, the idea of mental accounting is that we, a portion in our minds, different buckets of money. So, the idea here is if my salary goes into one mental bucket, it might go into a different physical account, of course. But, mentally, I think about my salary in one bucket. If I've just got a bonus of I just found some money on the street, right? This is a win for bucket. We behave differently depending on which mental bucket we put these two things in. Now, of course, a dollar is a dollar is a dollar. It should all be the same. We should all get put in the mix. But, that's not how people respond. So, one thing the auctioneer did to try and leverage this concept, and he did this again quite cleverly, is the idea that if we have a bucket for investments, we're much, much more able to understand that that is something I can invest more heavily in. It's an investment versus something that is a consumption that seems like it's more frivolous. If I buy a bottle of wine, I'm going to put it in my cell for a while, you know what, that's an investment versus if I buy a bottle of wine to drink well, you know what, that's a consumption. So, I'm not going to spend so much on that one. Of course, the one in my cell, I'm eventually going to drink it probably. So, it's all sort of how we create these buckets in our own mind. Now, he used it in the auction by saying, by couching the purchase in terms of an investment. Now, I don't know people in the auction whether they were there to purchase that as an investment property versus as owner-occupier, but by couching in terms of an investment, even if I am planning to live in it, he's trying to leverage that bucket which we have more willingness to spend. People often assume that investors are going to be more careful when they bid for a property than an owner-occupier, but this might even lend itself to an owner-occupier, not being or being more careful than an investor because they're not seeing it as sensible or well, they're worried about the emotion playing a part in and that concern about emotion might cause them to be more cautious. Yeah, maybe, but it'll often these things offset. So, if it's yes or my mental account is that this is a consumption, but that might be offset by, you know what, it's a really fantastic property and oh, I'd so love to have it. Sort of the emotional stuff that we haven't really touched on in a huge amount, but this is the elephant again. The elephant loves it, for example, it doesn't really matter what the rest of me thinks. So, what we've gone through, I guess, today is sort of six or seven of the big things and we really need to be careful, I guess, is where those six or seven things point in the same direction. Compound. That's right. So, if something is framing can make a difference, if it's framed as a loss, it makes a more of a difference. So, this is, I guess, perhaps where the checklist comes in. If all the things are pointing in the same direction, that's when the alarms and the bells should start ringing, the verses are sometimes they offset each other, then maybe it doesn't matter so much. Yeah, I mean, one thing I always notice with the property markets is people get into the debate around property versus shares, right? And, you know, why would you buy a property when it's paying a 3% yield? And, you know, you've got to pay $1.2 million for, you know, it's just not a good investment, etc. One of the things that does affect the property market compared to the share market is that people are actually buying it for a lifestyle and people are actually putting a value on that. So, they're mental accounting, they're willing, they've already made a million dollars in property, so they're willing to put another million dollars into property to make another million dollars. But even in that case, so there's a couple of other biases. One is, if I've just made a million dollars in my last property, okay. So, here is this mental account of windfall gains that I'm now more willing to spend, for example, but also the affect or the emotional content, then how good do I feel that I just made another million bucks and my property that I just sold? I'm feeling awesome. And when I'm feeling awesome, I'm more likely to go spending on things and having a good time versus the compounding effect of I just made a loss on this. Am I going to go out and be aggressive and buying the next thing? Well, no, I'm not. I'm tend to do the opposite. So, really in the past five years of boom in Sydney and Melbourne, I mean, we've seen that to great effects are people who may have sold and got a lot more than they expected. Then go out bid with, you know, over exuberance or over confidence because of this sort of mental accounting idea, I've got an extra $300,000 that I can blow really because I didn't expect to get it in the first place. But I think I observe, and tell me if this is right or wrong, Simon, you know, I observe the ways in which people bid and I think to myself, they've forgotten. So, say fragments say the bidding's up to say $800,000. And the auctioneer is encouraging them to bid another $500. It's a small increment. And it's almost like, I think they've compartmentalised and they said, right, $800,000 doesn't exist anymore. I'm only bidding $500. And I know the auctioneer is trying to get them thinking that way because I say, what's another thousand or what's another $500. And I keep thinking to myself, add it to what you've already bid. But it does seem to be that bidders respond to that. Would you say that that would, you saw that in the in effect? Certainly. If people are compartmentalising these amounts and only focusing on the small incremental amount, and the rest is maybe seen as a sunk cost store, it's part of this whole consistency effect, then yeah, it becomes easier, doesn't it, for $500 extra? I mean, when we're talking about mental accounting there, is that potentially leading to something Veronica should just mention there is overconfidence? When people talk about overconfidence and when psychologists define overconfidence, they're sometimes thinking about different things. So one of it is there's sort of better than average driver effect. We ask people if they think they're better than average, the year 80% of people feel that they're better than average drivers. There's a whole lot of things that could happen here. I think I know what's going to happen. And I'm pretty confident that that thing is going to happen. Whereas actually, there's a whole range of things happening. We get surprised more often than we think. So that that could be, I think the property is going to go up 20% next year. We tend to be too precise versus what often is called over optimism, which is just being too positive. I mean, that's a really good point there. It's over-positive versus over-confidence. And that's a bit of a learning there for me actually, because what I thought was over-confidence was actually just people being overly positive. And so, the over-confidence is probably the over-confident investor. You've done all right, you bought a couple of properties. And I noticed that a lot with a few investors for the first time, just recently, is that they're bought an investment property. And because the whole market's gone up, they've become over-confident in their ability to be a better investor. And really, I think, what they really need to understand is that it wasn't that they made an amazing investment decision and that they're an amazing investor. It's just because the market's moved and then they've been on the wave. And then they're overly positive for that property in the longer term, because it's done well in the short term. So, I mean, that's a really, really clever way of looking at it. And, yeah, I mean, that's marvelous. Part of that, I guess, is how we receive and respond to feedback. And we don't do it very well. So, that's how we should learn. Now, the situation you described, I bought a property, it went up, I made a monster, I'm an awesome investor. That's sort of the conclusions that you draw. Versus, when the opposite happens, we don't come to the same, the reverse conclusion. I bought a property, it went down, I lost money. Is that because I'm a really terrible investor? Oh no, you know what, I was just a bit unlucky and this happened, and the council approval didn't come through, whatever it is. There's a whole bunch of things that will get in the way of me learning from that experience. So, we tend to systematically learn the good stuff and avoid the bad stuff, which just continues to make us more and more over confident. I often meet people who did really well in their first property and they didn't actually know why or how they did well. It was an accident. And then they think that they're going to replicate that success. And of course, they don't know what they're doing. So, they think they're not what they're doing, but they don't. Yeah, I think that's, you know, unfortunately, a lot of clients will come to me and they've already got a few properties. And, you know, before we start thinking about going forward, we've always got to think, well, what are we actually own now? Have we actually got quality assets? And, you know, what I'm always noticing is a big biases towards not selling or not thinking that a property that's maybe not performing very well is going to turn around and become an amazing performer. So fast. Yeah. And I mean, I think with investing, it's as a definite bias there where we hold onto the properties because we don't want to lose and we hold onto the properties that aren't going to ever go up because there's just fundamentally something flawed with them. And then we sometimes sell the best properties because we want to cash in and feel good that we've made money. So, I mean, what bias is that? Well, it's called the disposition effect, but it's grounded in loss of version. So, I don't want to sell something that's gone down because that crystallizes a loss, doesn't feel like a loss until I've sold it. So, I haven't really made a loss. It's still sitting there. Oh, no, it's only a paper loss. It might come back up. All right. So, I hold onto that thing and this is where you observe and share investors as well versus the one that's gone up. When I crystallized this, I've made a monster again and so I feel good. I've made a profit. I can tell my mates about how successful I've been and so we tend to sell the stuff that's gone up and hold the stuff that's gone down. In the context of share investing where you can measure this stuff, perhaps more precisely over large scales than you can with property investing, it's called the disposition effect. But you see it in property investing, I guess, because when markets go down, volume is dry up. People don't want to sell it at a loss. So, you still see the same sort of dynamic. So, thank you Simon for sharing everything today and I always like to ask people, where can we do further learning? What more can we learn? And a great way to learn is via books and I believe that you've just written your second month. You can tell us a bit more about that. Oh, you've come to the right place. Yes, I have written a second one. It's called Cyborg, how to optimally integrate human and machine investment decision-making. It's a bit of a mouthful, but really the idea is, how do you take the things that machines and AI and machine intelligence, machine learning is good at and combine it with the stuff that humans are good at and create combinations of humans and machines? And without giving it away, can humans and machines work together to get a better outcome or should we be fearful of the machines? So really it's about working out what the flaws are in our decisions and this sort of stuff we've covered today versus machines and they're good at some stuff but not so good at others and the combination, I guess, again, it's saying to people, you shouldn't be fearful of machines because really if you just combine with them, you can do better than machines anyway. But the optimal solution long term is the man with the machine. Or even sometimes a woman with the machine? Yeah. You mean mankind. Yes, mankind. Yeah. Human kind. Actually, there's a chunk in there about sort of diversity in how you can combine teams of people with machines, sort of cyborg teams as well, but that's effectively bringing people and machines together to do better than one by itself. Well, I'm going to read it and thank you for my copy. We will put the link on the website in the show notes so that you can also buy the book. Don't stop at one. Thank you so much Simon, great to meet you and talk today. Thanks a lot. Thanks for having me. Every week, we hear incredible stories of the dumb things property buyers do. Dumb things that will end up costing them a lot of money or creating a whole lot of stress and mess, mistakes that can be avoided. Now, this week, for our DUMBO over the week, I have probably the most expensive mistake I could come up with for an individual buyer. Unfortunately, I wasn't actually at this auction. I would have loved to have been there, but I've heard this account from two separate buyers on two separate occasions. Now, this is an auction where the buyer actually bought the property for a million dollars more than they thought they'd bid. Now, get this picture. Two guys, Hammer and Tongues, bidding, they've forgotten what the property is worth. They've even forgotten how much they're bidding. The property ultimately sold for $6.75 million and the highest bidder apparently asked the auctioneer just before it sold to him. What? Where's the bidding? And the auctioneer said to him, so it's $6.75 million and he went, no, no, no, $5.75. So this bidder actually thought he was bidding a million dollars less than he actually bid. Now, the auctioneer, from what I've heard, quickly recognized what had gone on. Now, this is fair competition. The underbitter had stopped bidding. He's hammered down. This guy's bought the property and he clearly is able to fund this extra million dollars, but just the sheer fact that he got caught up in the emotion, the pressure, the theatre of the auction and ultimately bid a million dollars higher than he actually thought he was bidding. Now I tell you, if a buyer has $6.75 million to spend on a property, they're obviously pretty successful in their day job. So this is a smart person that managed to do this. What do you reckon about that, Chris? I mean, this is the auction, the craziness of you're in another world. Your emotion is taking control of you and this person here is that can't pull out once that hammer goes down on that third count. It's all over. I want to find that buyer. I'd love to be able to interview them. So I guess stay posted. We'll see what we can come up with in future episodes. That's the dumbbell of the week. Who is really in control when you buy a property? As we mentioned earlier, the elephant is a metaphor used by behavioural psychologists for our emotional mind. The elephant's rider is our rational mind. The question is, when writing an elephant who is actually deciding which direction you go in, the elephant or you? This podcast is designed to alert you to the power of the elephant, but awareness alone is not enough to make you strong enough to be in control. We want to make you a better elephant rider. So for this week's elephant rider training, we'll tackle anchoring. The only way to counteract anchoring is to do your own price research and set your maximum bid before you go to auction. You need to pressure test your limit. With FOMO, that's fear of missing out kicks in, and you find yourself responding to the auction's suggestion, it's going to require some mental strength to overcome the pool to bid beyond your limit. So be aware, then be prepared and stick to your guns. So what are we added to our memory bank today? Well, we've got an infographic explaining all the biases we talked about today with tips to help you master them. You'll find the link in the episode show notes on our website. BeElephantInTheRoom.com.au. Don't forget the "The" at the beginning. Please come back and join us next week, where we interview high-profile auctioneer Damien Kooley. Now our interview with Damien has been absolutely illuminating. I learnt so much. Now he's been absolutely frank and open in terms of sharing with us how he gets buyers to bid and how he gets them to bid more. You will not want to go to auction ever again without listening to this episode. We'll see you next week. Warning, no elephants have been harmed in the production of this podcast. We look forward to catching up with you next week. Until then, don't be a dumber. Me again, don't forget, if you've enjoyed this podcast, please tell your friends and we'd love an eye-chains review. We're getting lonely here. Be aware. I think we talk about on this podcast is generally nature and should never be considered to be personal financial advice. They will tailor and document their advice to your personal circumstances.