Buy Us or Bias
To the detriment of our businesses, clientele, and bank accounts, cognitive biases skew the mental portrait of the world that each of us internalizes and references when making decisions. These biases come in different flavors, but they all offer mental shortcuts that simplify the vast amounts of information at our fingertips, enabling us to break those decisions into bite-sized pieces. Such mental shortcuts can be tremendously helpful by reducing noise and allowing us to focus on what’s really important. You’ve probably read the claim that it deosn’t mttaer in waht oredr the ltteers in a wrod are, the only imoprtnat tihng is taht the frist and lsat ltteer be at the rghit pclae. It’s not too troublesome to read this sentence, and it seems to be a good example of the brain’s shortcuts. However, these mental shortcuts can also make us gloss over information that really is important, like the new stop sign on the drive home that’s missed simply because we’re not used to stopping at that particular intersection. Being aware of our biases is an important first step if we want to combat them.
Confirmation bias drives us to seek out information that is in accord with our currently held beliefs as a means to confirm them. We’re more likely to read things that support our position and ignore those that don’t, and we’re more likely to attribute credibility to ideas that agree with our own. It’s satisfying to hear others voicing support for our position, and, as a mental shortcut, this cognitive bias makes our decisions easier if we believe that others have drawn the same conclusions.
Recency bias refers to our inclination to weigh recent information more heavily than older information. Home prices rose last month, and so it’s easiest for us to conclude that they will continue to do so. It’s easy to forget that asset prices are highest before a correction, and our mental depiction of the world is simplified if we assume that the future will be like the recent past. However, assuming that the status quo will continue can leave us blind to important turning points.
We’re often too confident in our beliefs and decisions, and consequently the quality of those decisions suffers. This overconfidence means we’re unlikely to subject past decisions to further review or scrutiny which, is the path of least resistance, after all. Overconfidence bias is surely more prominent among experts that are certain of their abilities. It makes sense from an evolutionary standpoint as well, because the best use of our limited mental faculties is typically not to repeatedly reconsider past decisions, but instead to devote that energy to understanding new stimuli.
The Tides Effect
Housing Tides can help us avoid the worst effects of these biases. If we believe that all is well in the housing market, we’d do ourselves a service, and ultimately improve our decisions, by selectively reading housing news articles that posit alternative conclusions (i.e., seek out pieces with negative sentiment, in turn challenging the confirmation bias). Seeking out opposing viewpoints also serves to suppress our tendency towards overconfidence, as long as we entertain those ideas and acknowledge that intelligent, informed people may have come to different conclusions than we have. We shouldn’t have to make a broad judgment about an expert’s skill by looking at only their latest prediction; rather, we can defy recency bias by reviewing the entire track record of the expert’s housing market forecasts. Similarly, we challenge the tendency towards assuming the status quo with rigorous, proprietary permit forecast models that tell us what’s likely to happen given current circumstances, based on what happened the last time conditions were similar.
Mental shortcuts and biases can help us reduce information overload and quickly make judgments about the world, but they can just as easily lead us astray and result in poor decisions. By leveraging the tools in the Housing Tides report we can stay a step ahead of our biases and make better decisions, all while saving time.
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