Actuarial Notes

Addressing Built-in Biases in Real Estate Investment: The Value in Taking a Behavioural Lens to Commercial Real Estate Investing

By Matthew Richardson, Nick Armet, Chris Arnold and Cameron Ho · Fidelity International · 2018 · INV101-105-25

Study guide: Exam INV-101

A Fidelity International study of behavioural finance and its application to real estate, written for investment professionals. It explores five of the most entrenched biases in the institutional commercial real estate market (framing, anchoring, loss aversion, home bias and herding), outlines their consequences and proposes practical workarounds to minimise their effect. Each bias is introduced with what it is, how it applies to real estate investing, and the workarounds.

On the syllabus

  • Exam INV-101 — INV101-105-25, Addressing Built-in Biases in Real Estate Investment, including the appendix (outcome 2l)

Executive Summary

Introduction

  • Why is behavioural finance an important investment tool?
  • Why is real estate such a ripe area for behavioural biases?
  • System 1 vs System 2: fight or flight responses are much less useful in investing
  • Property is prone to feedback loops which cause bubbles and busts
  • How to invest in an inefficient market with irrational investors?

The framing bias

  • What is framing?
  • How does framing affect real estate investing?
  • Workarounds

The anchoring bias

  • What is anchoring?
  • How does anchoring apply to real estate?
  • Workarounds

Loss aversion

  • What is loss aversion?
  • How does loss aversion apply to real estate?
  • Workarounds

Home bias

  • What is home bias?
  • How does home bias apply to real estate?
  • Workarounds

The herding bias

  • What is herding?
  • How does herding apply to real estate?
  • Workarounds

Conclusion

Appendix 1: The Fidelity solution

References

Sources