The toughest question I have been dealing with over the past few years is: “why are people so stubbornly obsessed with optimism/pessimism that they are completely immune to persuasive data and arguments that contradict their beliefs?”

Just like politics, people have views of the real estate market right now that are passionate and obdurate. There are those that believe, “housing is always a good investment,” and there are those who believe that the weakening housing market will soon cause, “the most severe recession since the Great Depression.” Neither camp can be persuaded to even hear the alternative point of view.

I think that both camps need to be careful of two psychological phenomema. Cognitive Dissonance is a powerful force that I have written about in the past. Confirmation Bias is another factor that I believe contributes to the lack of openness in the two belief systems. The two together are nearly overpowering.

Most people invested in real estate, whether individually or professionally, must believe that it is a good thing. Their brains won’t really let them believe otherwise because it is too painful to do so (cognitive dissonance). Additionally, because of this bias, they constantly look for evidence that confirms their view and they dismiss anything that contradicts it (confirmation bias). In this manner, they go about building a dogma of real estate optimism without nary a second thought.

Likewise, many people who have sat out of the real estate boom are the mirror image. They believe that a financial plague will befall the economy because of all the people that took unreasonable risk in the market; their brains don’t let them think otherwise and they constantly look for their beliefs to be validated.

This is why great traders say, “get out to get clarity.” Bias is too powerful a force to allow successful trading.

For those invested in the real estate debate, on both sides of the fence, it’s not that easy. In order to effectively analyze the market, what we can do is recognize our biases and be cognizant of the fact that they are powerful forces attempting to prevent us from seeing the truth. With this clarity of mind we may actually be able to form educated and thoughtful opinions.

Then again, biases make for a pretty interesting, “Two Way Monologue… with words that rhyme.”

LIV

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