7 Stupid Thinking Errors You Probably Make
Posted: Thu Sep 13, 2007 11:38 am7 Stupid Thinking Errors You Probably Make
(applied to real estate)
1) Confirmation Bias - "I've heard real estate always goes up and it has rocketed up since I've been in the Puget Sound so that must be true."
2) Hindsight Bias - "I bought a house a few years ago and it has doubled in value. I knew housing was a good investment. I bought because I was smart."
3) Clustering Illusion - Random changes in the market can make people think a bull run is beginning and entice more people to buy. The extra demand actually causes a bubble bull market. As the bubble contines, people with higher resistance against the clustering illusion fall to recency effect and enter the market allowing the bubble to continue. Eventually the supply of new participants is exhausted and the bubble bursts. Or maybe I'm just a victim of the clustering illusion.
4) Recency Effect - "Despite the fact that historical records show housing appreciates at the rate of inflation over the long term, because prices here have been skyrocketing recently, I think they are going to continue skyrocketing."
5) Anchoring Bias - "I've seen houses selling here for $300-400/sqft for years so that is what I expect housing to be worth here."
6) Overconfidence Effect - Nearly everyone at the Seattle Bubble is guilty of this one. Including me. "Housing prices WILL drop soon." "Housing prices WILL keep rising."
7) Fundamental Attribution Error - "Seattle is special. That is why prices have been rising."
(applied to real estate)
1) Confirmation Bias - "I've heard real estate always goes up and it has rocketed up since I've been in the Puget Sound so that must be true."
2) Hindsight Bias - "I bought a house a few years ago and it has doubled in value. I knew housing was a good investment. I bought because I was smart."
3) Clustering Illusion - Random changes in the market can make people think a bull run is beginning and entice more people to buy. The extra demand actually causes a bubble bull market. As the bubble contines, people with higher resistance against the clustering illusion fall to recency effect and enter the market allowing the bubble to continue. Eventually the supply of new participants is exhausted and the bubble bursts. Or maybe I'm just a victim of the clustering illusion.
4) Recency Effect - "Despite the fact that historical records show housing appreciates at the rate of inflation over the long term, because prices here have been skyrocketing recently, I think they are going to continue skyrocketing."
5) Anchoring Bias - "I've seen houses selling here for $300-400/sqft for years so that is what I expect housing to be worth here."
6) Overconfidence Effect - Nearly everyone at the Seattle Bubble is guilty of this one. Including me. "Housing prices WILL drop soon." "Housing prices WILL keep rising."
7) Fundamental Attribution Error - "Seattle is special. That is why prices have been rising."