BUYERS: “Cognitive Bias” That Can Break You in Real Estate
BUYERS: “Cognitive Bias” That Can Break You in Real Estate
“The most confused you will ever get is when you try to convince your heart and spirit of something your mind knows is a lie.” ― Shannon L. Alder
There is actually a term to describe the “condition” that many misinformed home buyers can experience that is deemed a “cognitive bias”. Buyer’s Stockholm Syndrome is also known as post-purchase rationalization according to Wikipedia, and is described as being a cognitive bias “whereby someone who has purchased an expensive product or service overlooks any faults or defects in order to justify their purchase”. This sounds like many people who find and marry their partner after a few match.com emails or a home buyer who is so desperate to own that they fail to ensure that they can afford their purchase or that they perform the necessary inspections on the home to avoid facing thousands of dollars in repairs later on.
The cause of this bias is based on the principle of commitment or closely related to cognitive dissonance. Cognitive dissonance simply means that someone may feel stress when faced by the contradiction of two or more beliefs that do not agree with each other, often occurring after a person makes a large purchase such as a car or house. You may have thought that the jacket you bought that was over your budget looked amazing in the store, only to realize that your old coat fit a little better or the money you just spent needed to go to paying down the credit card. Many consumers alleviate their cognitive dissonance in this case by simply returning the jacket, but when it comes to larger ticket items, such as real estate or a new car, this may not be an option.
As real estate professionals, I believe that we have a duty to protect our clients’ interests. Firstly, we can ensure that all items on a title search are thoroughly checked and reviewed. Secondly, we can encourage clients to obtain inspections and quotes for any necessary repairs to a home. Thirdly, we can provide background information on a home that is essential for a buyer to be aware of when purchasing. Information that might be helpful to a buyer would include whether or not the home has ever been a grow-op, if a home is located in a high-crime neighbourhood, background of a builder, or recommend a mortgage lender. Having the facts before you buy can save you financially and alleviate any symptoms of buyer’s remorse.
We all want to believe that we are making good choices when it come to our purchases. When we purchase something that doesn’t work out, it conflicts with our previously existing belief about our own decision making abilities. We begin to assess the pros and cons AFTER our purchase.
According to Manoj Kumar Sharma, there are 4 types of consumer buying behaviors. The Routine Response (programmed behavior) often involves consistently purchased small ticket items that we purchase without much thought. An example of this purchase might be the weekly milk and bread that we buy when getting groceries. Limited Decision Making behavior involves an occasional purchase of a specific brand or product. We might spend a little bit of time considering a purchase such as this, but we will likely know what we want in advance. An example of this might be the purchase of an article of clothing – we know that we want a jacket, but we might not know which brand or size we will purchase.
As well, if we feel any buyer’s remorse, we often have the opportunity to return the item which limits our risk associated with such a purchase. Complex Decision Making requires a high level of involvement and concerns the purchase of a infrequently purchased item. This type of consumer buying behavior reflects the purchase of a new car or house, as there will be a perceived high level of risk involved. Impulse Buying is the type of purchase that requires no conscious planning. Have you ever bought something because it “looked comfortable” or the style appealed to you and yet you had never considered purchasing the item before you walked into a store?
Not all buyers are the same. I have seen clients exhibit Impulse Buying behavior when it comes to the purchase of a home. Many times I have advised these type of clients to go home and think about the purchase before rushing to making an offer. Other times, I will encourage buyers to get pre-approved for their mortgage BEFORE showing them homes as it can be very disappointing to look at $600k executive homes and then find out that you can only afford $275k since your credit card, student loans and other accumulated debt negatively affected your ability to buy the type of home you want.
Conversely, we all have a friend or family member who seems to live their life in a constant state of Complex Decision Making – even if it concerns the most minimal of purchases. They will constantly double and triple check their hotel reservation, and cancel as many times as needed to ensure that they are paying the lowest price for their stay. These types of buyers may even wear an outfit that they have purchased to an event and return it to the store the next day, because they can no longer justify the value of the outfit since people have seen them wearing it once. This type of buyer will compile mounds of research and data and carefully review it prior to making any purchase and seems to be driven by the fear of having buyer’s remorse.
Whatever type of buyer behavior seems to best describe you, protect yourself and your investments by having professionals assist you when making the decision to purchase a home or property. Be prepared to accept that a home may not work for you, whether it be the cost to repair items found in a building inspection, or may exceed your budget when utilities and maintenance costs are factored in. Ensure that you are working with a professional real estate advisor who is going to look after you, and not simply try to push you into buying a home and not providing you all of the information that you need to make an informed decision.
Brian & Myles McCullough