Living in the mythical stereotyped Financial World

Generalizations & Stereotypes

Having understood a bit about developing “buying skills” let us see what hinders our performance in being good buyers. One of the reasons why people behave in such a manner is because of “Heuristics”. The individual human “Cognitive” machinery is overloaded with the task of making decisions. Right from getting up in the morning till the time one finally goes back to sleep, all we are doing is making decisions. Every decision making, small or big, demands energy and consumes the cognitive bandwidth. Hence, the human mind resorts to generalizations and relies on shortcuts.

This serves as an efficient method of navigating through the daily routine of life, but such shortcuts can be expensive when it comes to big financial decisions. The need for due diligence cannot be overemphasized in Real Estate decision making.

But let us also examine what forms these shortcuts or the generalizations. These generalizations are usually overblown, exaggerated examples of something which has happened with some frequency either beneficial or harmful. It cannot be said that generalizations do not have a basis but it can be said the basis is mostly lost by the time the generalizations gain currency.

The Myths & Misconceptions are born

These generalizations then give birth to common myths, misconceptions which further lead to faulty decision making and losses.

I would first list some of the myths and misconceptions which are prevalent in the financial industry, in general.

Real Estate Consultant

  1. Direct equities are riskier than mutual funds.
  2. Gold is the safest asset.
  3. Investors should diversify. Don’t put all eggs in one basket.
  4. Blue chips stocks give the safest returns.
  5. Markets are efficient. (The economists who proposed Efficient Market Hypothesis even got a Nobel Prize for the work).
  6. Financial newspapers are a reliable source of market analysis.
  7. Mutual funds are less risky due to pooled resources and expert fund managers.
  8. Rupee cost averaging helps in improving returns by averaging market spikes.
  9. Penny stocks give handsome returns due to small denominator advantage.
  10. Price is an indicator of quality.

Then there are some very common myths prevalent in the Real Estate market. Some of them are listed as below.

  1. A big builder means good returns.
  2. Location determines returns.
  3. The commercial property gives better returns than residential property.
  4. Real estate is illiquid.
  5. Prices of properties never go down.
  6. The land is the best investment.
  7. 2 BHK gives better returns than 3 BHK.
  8. Pre Launch is the best time to invest.

Now all these and many many more myths are what smart marketers exploit to the hilt and induce faulty decisions.

Property Advisor

Why do we want to still live in such folklore

Why do we give any credence to these myths is because these myths make our decision making “easier”. They make it “easier” not necessarily “better” or “beneficial” or “correct” but “easier”. The mind gets induced into “analogous thinking” rather than “first principle constructive thinking” and hence finds parallels to take decisions. This releases the pressure from the minds and for a while helps us feel good about ourselves. The decisions made are also mostly in agreement with the commonly held beliefs which further act as a cushion against rough edges of judgments from near and dear ones. Also in the eventuality of mistakes, one can always fall back to the comfort that the decisions were taken in accordance with prevalent and common wisdom.

Hence, these myths and misconceptions will continue to prevail and people will continue to err on the side of costly financial errors. No amount of writing about it is going to make a real difference.

Home Buying Decision

Though at the cost of repetition and irritation to the buyer it is important, rather very important, to guard falling prey to these and numerous other myths. The buyers should develop a deeper an understanding of the investment world and also spend resources in developing understanding of the asset class they wish to focus on.

Due diligence is what will help in making right decisions rather than shortcuts. The due diligence is to be able to sift between myth and realty, between fact and fiction, between reality and generalization.