Why Do Investor Brains Turn To Mush At Property Auctions?


In this blog post I will be talking about a process that has been carefully honed over hundreds of years to turn the brains of intelligent people into mush: the open outcry auction.

Several psychological forces are cleverly exploited in these environments to extract as much money as possible from bidders. If you know what these forces are, and arm yourself against them, you can turn the tables and even bag yourself a bargain!

Psychological manipulation #1 – Commitment and consistency.

Robert Cialdini, Harvard professor and the author of the New York Times bestseller ‘Influence: The Psychology of Persuasion’, found that if people commit to an idea or goal they are more likely to honour that commitment to maintain congruency with their self image.

At property auctions, investors ‘commit’ in various ways:

– A journey is made to visit properties under consideration. Such trips involve committing both time and money.
– A builder is taken or sent to view properties (this also invokes the tendency to reciprocate by buying the property).
– A valuation is performed – this involves a cost to the investor (a strong form of commitment) without any guarantee of acquiring that particular property.
– The investor tells their spouse and friends which properties they like the look of (thus reinforcing their commitment).
– Legal packs are downloaded and analysed, perhaps a solicitor is engaged to give a second opinion on more complex matters.
– Attending the auction sale and publicly bidding for lots are a form of psychological commitment.

Having committed, in these varied ways, it becomes harder to walk away later because we are wired to remain consistent with prior commitments. For example, I have met several investors who justified bidding way above sensible prices by saying to me “well I have come all this way, why go home empty handed?”

Psychological manipulation #2 – Envy/Jealousy.

Envy and jealousy are deeply rooted important emotions that have helped the human race adapt and survive over thousands of years (for more information see http://www.oxfordscholarship.com/view/10.1093/acprof:oso/9780195327953.001.0001/acprof-9780195327953-chapter-4).

Their manipulation by others is best explained by example. Here is a video from a popular television series https://www.youtube.com/watch?v=I6ZLUBAfWYg.

Notice how the winning bidder felt pleased to have won the auction when in fact he had paid more than anybody else thought the lot was worth!

Beating the other guy became the primary objective no matter the cost. Also, notice how the auctioneer and his wife establish and try to maintain a fast paced momentum which keeps bidders from thinking too much about what they are buying (a pile of junk in most cases) and how much they are paying for it (a lot more than its true worth).

An auction room lends itself very well to invoking envy and jealousy. Of the 100 or so people in attendance at a typical auction, perhaps only 5% (5 in 100) are serious bidders for a particular lot (they are going to bid, are willing to pay a reasonable price and have their 10% deposit ready). However, looking around the room, it is not clear who is interested in which lot/s so the brain defaults to thinking there is a lot more interest for any particular lot than is actually the case.

Psychological manipulation #3 – Survivor bias.

This one applies to investors with less experience. Survival bias is the error of focusing on the good deals, because they get bragged about and shown on TV programs, and overlooking the bad deals because the stories related to these properties are often buried and rarely talked about.

This bias will have the effect of making investors think that turning a profit at auction is easier than it actually is. This in turn draws more people to the room and due to social proof, we get a feedback loop which unravels when the ‘easy money get rich quick’ stories change.

Here is an example of survivor bias in action – notice no mention at all of of the thousands upon thousands of units that have caused people to lose money https://www.youtube.com/watch?v=ZgM7Ptvfan0. Lotteries are a very good example of survivor bias by the way.

Psychological manipulation #4 – Scarcity.

This manipulation is tied to the finding that people are twice as motivated by loss than gain (see https://en.wikipedia.org/wiki/Loss_aversion). For instance homeowners were found to be more motivated by how much money they were losing by not insulating their homes, rather than how much money they would save by insulating.

A thing typically becomes more valuable the less available it is. At a typical property auction, only one property of a particular type in a specific area is likely to be available. To add to this scarcity, it is available for only a limited period of time.

Psychological manipulation #5 – Overoptimism.

“What a man wishes, that also will he believe.” – Demosthenes

Optimism has its evolutionary benefits, but too much of it can be a problem. In the same way that 90% of drivers say they are ‘above average’, it can be reasonably expected that way too many auction participants underestimate the costs of developing the property they are trying to buy, causing them to overpay. For more on this see http://www.scientificamerican.com/article/opting-out-of-overoptimism/.

Psychological manipulation #6 – Anchoring.

Smart auctioneers will place cheap overpriced lots right after attractive, expensive properties. Such positioning invokes the anchoring principle, where the minds of buyers become ‘anchored’ to the large value of the prior lot, making the cheaper unattractive lot seem good value.

The purchase by London investors of thousands of Northern properties is a good example of this principle. These investors are anchored at £400k for a typical 2 bed flat, so when they are offered the same square footage for £80k it seems very cheap.. Yet surprisingly few bother to research the local market to discover their £80k flat is only worth £60k in the local market – that is the power of anchoring!

How to bid without falling prey to common psychological manipulations..

  • Send a (calm and rational) friend to bid for you – give them strict instructions to stop bidding at your top line figure.
  • Bid prior to auction, adding a time limit to your offer. This puts time pressure on your side and you can still bid at or post auction if your bid is rejected.
  • Try bidding for unusual or complicated lots (if you have the relevant expertise). This reduces competition and you will be less likely to be influenced by others.
  • Consider bidding online to reduce commitment.
  • Get to know the value of what you are buying by consulting experts and understanding the market.

Perhaps you have had some of these psychological manipulations used on you at an auction? If you would like to share your experiences please feel free to comment or drop me an email.



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