To Investors: Control your own Brain

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

August 2008

The popular saying of “one could be one’s own worst enemy” appears to harbor some truth with the advance of neuroscience, genetics, and behavioral research. Perhaps a more pin-point description could read “your brain could be your own worst enemy”.

Yet this article is not about the rationality versus irrationality debate. Besides, your humble author has come to suspect that homo sapiens (humans) actually need both characteristic traits to survive and strive. That is, we may not function well or at all IF we were ONLY rational (thinking, analytical etc) or ONLY irrational (emotional, intuitive, instinctive etc) beings. At least the world we know would be very different IF we were ONLY either. In short, the key is how to utilize such characteristic traits to their best possible combinations and to our advantage. 

Here we are concerned with what our brains tend to like, prefer, want, or fall for, and at times without you knowing or being conscious of it, and what such tendencies may bring in terms of (self-inflicted) investment traps and tricks:

A)     Our brains are easily impressed by show of strength and stamina = in short, good looks and body build. While this tendency is useful in helping men and women identify potential mates from a reproductive viewpoint especially in the more distant past, it also steers us to prefer formidable-looking institutions to smaller outfits comes deciding in which entities to invest. And this is one of the reasons why big corporations tend to locate themselves in the prime offices with plush interiors, not to mention a team of well-dressed staff and high presentable investment brochures. While certainly a big corporation could be a good investment asset and enjoys advantages which a small company does not, being big is in itself not a guarantee of investment (or business-corporate) success. Proof? Compare the Fortune 500 list of the 1950s and that of today. The point here is good presentation does not automatically equal good investment advice, business, or opportunity but our brains sometimes cannot differentiate this.

B)     Our brains are geared for simple commands and comprehensions = not sophisticated thought processes which need to be developed and trained. Proof? Say a new digital camera comes with a full instruction manual and a summarized operational sheet, which one do you think most people would read first if they ever read such notes at all? In a business presentation, and given all things being equal, the presentation which simplifies and summarizes the content into 3 main points generally wins over the presentation which is lengthy and contains 12 main points. While having more points does not imply a technically better argument, the process of simplification and summarization can at times sieve out a seemingly trivial point or two which prove to be vital later on. In short, asking people to be ‘brief’ all the time harbors certain dangers, and thus self-inflicted risks. There are times for simplicity and there are times for sophistication.  

C)     Our brains are geared to follow the numerous = i.e. our brains find comfort in numbers or being in the majority (for want of being sociable, loved, or accepted etc) even when we have been educated to use, trained for, vigorously tested on, and proven capable of independent thinking. Your humble author recalls a Dilbert cartoon script which depicts a brilliant idea was thought up by Dilbert but then when his co-workers showed up and started discussing it, the idea gradually became very much watered down and mediocre. This in itself will not be problem if not for the observation that the majority view in anything, including (real estate) markets, could become totally unrealistic leading to disasters at times.  

Going with the biggest, simplest, and most numerous may lead to investment gains in many instances thus giving an impression that this is the proven way to invest. But is it really?

Notes: The article and/or content contained herein are for general reference only and are not meant to substitute for proper professional advice and/or due diligence. The author(s) and Zeppelin, including its staff, associates, consultants, executives and the like do not accept any responsibility or liability for losses, damages, claims and the like arising out of the use or reference to the content contained herein.

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