The biases that bait buyers

We're all convinced we're logical. But our property buying and selling decisions are rooted in psychological biases -- many of which we're not even aware of.

The relatively new fields of neuroeconomics and behavioural finance have found that our investment decisions in real estate aren't a rational process -- as traditional economic theory would have them. The list of mental shortcuts (heuristic biases) that affect our property buying and selling include:

• Framing. We create frames when buying property and view the decision through those frames. One frame could be "everyone is buying a rental property" so we do it even if it's not right for us.

Dr Catherine Frethey-Bentham of the University of Auckland Business School points out our price perceptions can be framed by messages from the media about pricing. How a price-related frame might work is that as soon as the market levels off we frame the purchase as if it's suddenly a bargain.

• Anchoring. How this works is that we are primed with a reference point from which we judge the price. Real estate agents love this one. They tell us, for example that the average price in this suburb is $1.2 million. Because the property they're selling is only $1.025m, we think we're getting a great deal.

Who says this house is worth more than $1m? Another form of anchoring is bait pricing. That's advertising an unrealistically low price as the anchor to get people to the auction room.

Agents who do this, says Paul Foster of Ironbridge, believe that if you "quote it low" you "watch it go". Foster thinks it's a cruel trick on first home buyers in particular.

• Herd behaviour. This is our tendency to rush in to join the crowd. So if the crowd is buying, we buy too. Herd behaviour can be benign. But it makes property market crashes even more dangerous because everyone rushes at once to get out, causing the fall in prices to accelerate.

• Confirmation bias. This is a bias where we start off with the conclusion and then look for "facts" to confirm our bias. We think we've been logical by lining up all these facts to support the purchase of a certain home. Instead we've just skipped past all the cons and only looked at the pros.

• Hindsight bias. We all know after the fact that we should or shouldn't have bought that property on this date or in that location. At the time, however, it seemed like a good idea. Or you knew all along that the market was going to tank.

Neuroeconomists have found that this bias causes memory distortion and the reconstruction of our memories can lead to false outcomes.

And finally, the best cognitive bias of all is the "bias blind spot", a term created by social psychologists at Princeton University. This bias is inability to recognise that we suffer from some of the cogitative distortions mentioned.