Unfortunately, the human mind is not a perfect instrument for making decisions. Our brains are hard-wired with cognitive biases that affect the rationality of our decisions, whether we like it or not. Learning to overcome these biases is not as simple as flipping a switch.
Why a Rational Decision Is So Important
First, let’s take a look at why a rational decision is strictly better than an irrational one when buying a home:
Price and value
Your house may be a place to call “home” with your family, but it’s also an investment opportunity. Judging the intrinsic value of a home is important if you want to pay a fair price for it; otherwise, you could end up overpaying, and compromise your eventual profitability.
Disproportionately valued factors
Bias may also cause you to overestimate or underestimate the importance of specific factors about the home, resulting in a poor decision all-around. For example, you might be turned off of a home because of the color of the walls, when this is a factor that could easily be changed in the future.
The size of the decision
Purchasing a home is also one of the biggest financial decisions you’ll ever make, so it’s something that deserves your attention.
Types of Bias That May Affect You
So what are some of the types of bias that might affect your decision?
Ingroup favoritism, or ingroup bias, is your tendency to disproportionately value the opinions or perspectives of people who share a group with you, such as your close friends or family members. For example, if your best friends love the look and feel of a house, you may be inclined to overlook some of the red flags associated with it.
Observational selection bias
Observational selection bias is an interesting phenomenon that makes us notice previously overlooked factors once our minds zoom in on them. For example, if your friend purchases a new sports car, you might notice the same model of sports car everywhere you look, at a seemingly higher rate than before. Applied to your home purchase, this bias can make you disproportionately give attention to factors that you’ve preselected as important; you might, for instance, immediately notice the condition of the front porch of every home, and use that to judge the entire value of the property.
Status quo bias
As human beings, we’re fairly resistant to change—resulting in the status quo bias. This is your tendency to make decisions that allow things to remain the same; for example, if you’re used to a home with a basement, you might be unmovable on your new home having a basement as well.
The current moment bias
We also have a natural tendency to favor the present over the future, in a phenomenon known as the “current moment bias” or present bias. It’s difficult to imagine what your wants and needs will be in the future, so too many homeowners make a decision that’s most likely to benefit them immediately (and in the next year). Ultimately, this is problematic if you plan on living in your home for longer than several months.
Anchoring bias is your tendency to inaccurately value things once you’ve been exposed to a concrete number; for example, after being shown a $500 bottle of wine, you may think a $100 bottle of wine sounds inexpensive. If you’re touring lots of houses outside your comfortable price range, an overpriced home within your price range might seem more affordable and more valuable than it actually is.
Though not technically a bias, your emotions may be influencing your purchasing decision more than you realize. If a particular house evokes lots of feelings of nostalgia, for instance, because it reminds you of your childhood home, you might overlook some of its biggest flaws, or be willing to pay more than you normally would. You might also make an irrational decision if you’re in a particularly sad, angry, or frustrated mood.
The Keys to Overcoming Bias
These biases may be intrinsic to human beings, but that doesn’t mean they can’t be resisted or mitigated. Try using these core strategies to help overcome your biased decision making:
Acknowledge your limitations
Knowledge is half the battle. Understanding the cognitive biases that can (and will) affect your decision making will help you spot them when they develop in the course of your search. You can strengthen your ability to recognize these tendencies in your own behavior by searching for signs of them in others.
Play devil’s advocate as often as possible, and challenge yourself on even your strongest points. If you think this is your dream home, specifically look for details and factors that contradict this evaluation. If you’re thinking about making an offer above asking price, come up with a list of reasons why you shouldn’t. Asking critical questions will always strengthen your rationality.
Listen to other opinions
Other people in your decision-making sphere may be affected by bias as well. They’ll be subject to different biases—and different opinions. Get as many honest opinions as possible from your real estate agent and those in your personal circles. Even if you disagree with them, you’ll have more information to make your decision with.
Give it time
You can almost always count on making a more rational decision if you give yourself more time. If you’re ever concerned about the strength of your decision, sleep on it; you’ll feel refreshed in the morning and might have a new perspective to bring.
Green Residential Professional Property Management
Are you hoping to make a more informed, rational decision with the purchase of your home? Or do you need help navigating the waters of homebuying? Contact Green Residential today, and we’ll pair you with one of our homebuying experts.