It Was Confirmation Bias That Overpriced My House, Not Me!

Confirmation bias, what is it? It is the psychological thing within most of us that colors our ability to admit we are wrong. I suffer from it mostly within the realm of investing. When I make an investment, I am never wrong. But of course, I am, many times. But I cannot admit it until its too late. Because I am so smart, I cannot be wrong!

My own bias in investing

So I wait until I lose even more. And then finally after getting beaten to a pulp on a certain investment, I will finally capitulate. I finally overcome my own confirmation bias, and admit I am wrong, and pull the plug on the investment. Selling a dog stock after losing money means I was wrong. I feel can’t have been wrong! After all I did all that research. I am smart and I have to have been right!

Confirmation bias has vast implications in all that we do, believe, think and vote for.

A more formal definition for confirmation bias reads:

“Confirmation bias is also called confirmatory bias or myside bias. It is a tendency of people to favor information that confirms their beliefs or hypotheses. People display this bias when they gather or remember information selectively, or when they interpret it in a biased way.”

Confirmation bias has been described as an internal “yes man”. Some say this was all realized only after a series of experiments in the 1960’s which suggested that people are biased toward confirming their existing beliefs.

How does this impact the mortgage and real estate world?

In real estate

In real estate confirmation bias applies to the listing price on a home for sale, and why we all think our homes are worth more than they really are. But then many times our home sits on the market for 3 to 6 months with no offers. Eventually the marketplace tells us what it’s really worth. If we can overcome our confirmation bias, we drop the price and sell. If we cannot overcome our confirmation bias, we take the home off the market. Or we do not choose to work with what are otherwise reasonable offers.

In the mortgage world

In the mortgage world confirmation bias affects a choice of mortgage lender. We want to believe we can get a free lunch. We want to believe we are smart enough to make that one extra phone call that finds a special deal at a lower price. But then when the loan goes badly, you don’t call back to the other lenders you spoke to or may have been referred to. And you do not wonder if the level of service you are getting was impacted by the price you got, because it means you were wrong. You would have to admit there really is no free lunch. You would have to admit you made a poor choice. Most of us do not admit this, and we choose to attack the mortgage lender we chose at the lower price. We get angry and wonder why they could not deliver the mortgage at a level of service we expected, even at a discounted price.

Confirmation bias is a silent killer. If you can overcome your own confirmation bias you will be surprised how much better your life goes.

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