Simon Russell on the Behavioural Biases Playing Out at an Auction

In this episode, we're taking you back to the very beginning of the Elephant in the Room podcast. We're bringing back our first ever episode, the one where we discovered the 12 behavioral biases with a few extras thrown in that are at play during an auction.

And we're going to revisit some of the tricks that your mind plays with you throughout the entire auction process, as well as the ways auctioneers and agents, whether they know it or not, are exploiting our own behavioral biases along the way. Welcome to the elephant in the room.

This is the podcast where we love to talk about the big things in property that never usually get talked about. I'm Veronica Morgan, real estate agent, buyer's agent and buyer's agent mentor, co-host of Foxtel's Location, Location, Location Australia, author of Auction Ready and co-host of Your First Home Buyer Guide.

And I'm Chris Bates, mortgage broker, recently ranked number five in Australia out of over 18,000 brokers in the annual MPA Top 100 Mortgage Broker Awards. Before we get started, I need to let you know that nothing we say here can be taken as personal advice.

We always recommend you engage the services of an appropriate and experienced professional. Back in 2018, we interviewed Simon Russell, who's a behavioural scientist, and he shared with us his experience after attending his very first auction.

And he deconstructed it, if you like, and went through 12, but we did, through our conversation, reveal a few extra behavioural biases that were at play. It was an instructional or instructive – is that the word –

interview for us and it formed the absolute foundation for this entire podcast that we are now nearly at seven years. So, Chris, I thought we might just quickly share a story with the listeners before we replay this episode as to how the podcast came about. Do you remember all those years ago? Well,

I do remember having, uh, obviously we knew each other because there was a broker, um, your buyer's agent. And I remember us having lunch and we're having some Thai. Um, and we were all of a sudden they said, ah, you said I'm passionate. I want to do a podcast.

So I would do a podcast too. And, um, I don't even think we got the elephant name at the start. We didn't. I feel like we interviewed Simon first. Correct me if I'm wrong. And, you know, seven years ago was a long time. It was six and a half, I guess.

2018, May 2018 was our first episode. I think very beginning. I wasn't married. Yeah. And the business was very different then. And so, you know, a lot's changed in your world. I mean, do you remember, how did we even come up with the elephant name?

I remember there was a time we sat in your office in Balmain and we were debating, you know, really what's the crux of what we want to talk about. And it was all the things that people didn't talk about.

And I think that's where we ended up on the name The Elephant in the Room.

So the elephant is a metaphor for our unconscious mind, and our conscious mind is the rider on that elephant. And so the rider really might think they're in control, but if that big elephant decides they're going to go left and the rider wants to go right, guess what, fellows?

We're going left because the elephant and our subconscious really dictates a hell of a lot more of our behavior than we give it credit for. And so being aware of that and really shining a light on how our unconscious mind works informs our decisions and causes us to act.

That sort of, that emerged, that idea came out of that interview with Simon. It was actually discussion first and then we put together an interview from that. And then that formed the basis of really talking about the things that influence the property market,

macro right down to micro, talking about the things that people generally don't talk about in the property market. That's the elephant in the room. So it's a bit of a play on words in a number of different ways. And I remember we got really excited.

That's when the idea of the Dumbo came up.

We're laughing, thinking we can have a bit of fun with this, which we have. And as you said, nearly seven years later, I've learned so much. And in fact, my whole interest on behavioral biases and human psychology has really blossomed.

And I've continued, and I'm sure you have as well, researching and reading about that whole area as well. So it's been great for me and for my business. And I'm sure it has for you and yours.

And we hope you, the listeners, will enjoy this episode that we're bringing back to you because we refer to it a lot. But what we realize is that, you know, it's so long ago. People probably aren't listening to it. They're listening to the more recent ones.

And we think it's still relevant today as much as it was back then.

Oh, we definitely did get excited. We actually bought a hat that we ended up losing, which is a shame because I love that hat. I have a hundred people photographed in that hat. We had the elephant ride at boot camp. You remember those? Oh God, yeah.

Training things that we had in our episode. We found some music. Um, Yeah, we got very excited and yeah, what a journey. And it's been interesting, right? Because if you look at 2018, that was a tough time in the Royal Commission. Sydney was dropping, you know, pretty fast. It was 10, 15% down.

And, you know, the 2019 election surprised people. We had the boom and we had COVID and we had the post-COVID boom with the regional movement and, you know, the impacts of higher interest rates. And so, yeah, Yeah, I mean, there's never a shortage of people that we want to have on.

And so if you've got any tips who you want to interview in 2025, just let us know because, yeah, there's lots more to cover and we're not going anywhere. So we hope you enjoy the first episode and we hope you enjoy listening to us in 2025.

Absolutely. Here it is. Simon, welcome. Thanks both. Thanks very much for having me today.

Simon is the founder and director of Behavioural Finance Australia. He provides specialist behavioural finance training and consulting to clients in the financial services industry. With qualifications in psychology and investments and experience working with a broad range of professional investment teams, Simon is part psychologist and part investment professional.

Tell us a bit more about that, Simon. individuals making choices in terms of property, in the case of what we're going to talk about today, in terms of their super, but also how sophisticated financial decision makers use these sort of decision-making biases and how it affects markets, that sort of thing.

But what tends to happen is in the research that these underlying decision-making biases, there are ways that we make choices that often blindside us. We think we're doing something, but actually we end up doing something else. and that other thing sometimes is not actually in our best interest.

So that's pretty scary. So Simon, you don't normally focus on residential property investing, but recently you attended your first property auction in Melbourne. Now, I'm really interested to hear all about what you observed. I rocked up, I guess, at the point the auction was about to start.

The first thing I noticed was pretty much just as I got there, a coffee truck that had been parked straight out the front of the house. Then the driver got in and it drove off.

So what I observed then was a whole lot of people who were coming out of the house all had in their hands takeaway coffee cups.

So they'd been given, I presume, coffees from this coffee shop van thing that I presume had been put there by the auctioneer or paid for by the auctioneer or the vendor in some way.

Okay. And why does that matter, I guess? What were you thinking when you saw that? Well, this is the thing. So all of these things should not matter. So in a rational world, you give me a cup of coffee, I should say, thank you. That's nice of you.

I felt like a cup of coffee shouldn't make no difference whatsoever to the bidding process. However, we are not quite as rational as we think. So what's happening here is what's called a reciprocity effect.

So the reciprocity effect is when you do something for somebody, they feel an obligation to do something back for you.

Are you saying, though, that basically if I go and they give me a free coffee, I'm more inclined to bid? you're more inclined to feel an obligation to do something in return. So that obligation, you can return that favor, if you like, in a number of different ways.

And the thing about the research says that it doesn't have to be proportionate. It doesn't have to be the same thing.

I don't feel I have to get you a coffee because you just got me a coffee, but I have this obligation that I feel, which might mean that I feel more obligation to bid.

Or maybe I feel an obligation to bid a bit higher so that there are a range of things, I guess, in the context of property that I might sort of use.

So a $5,000 extra bid versus a $4 coffee is highly disproportionate, of course, but that's the sort of thinking, I guess, behind why you'd put that coffee shop there.

Can you just, I guess, explain why do these things even matter in the first place? Why are we even discussing this? So I guess when you look at the human brain, you've got a layer on top of the human brain, which is our cortex, which is where the rational thinking takes place.

It's a complicated thing, the human brain, but in simple terms, the rational stuff sort of sits on the top. And underneath that, you've got all of the subconscious parts of the brain that deals with emotions and the like. And that actually is the emotional part, the sort of subconscious part, is the majority.

So you look at the human brain, most of it is happening at subconscious levels, and the links from those subconscious levels back up into the rational part are quite strong.

So the subconscious part is really influencing the rational part, whereas the links from the rational part down into the subconscious part are much weaker. So it's a bit like the analogy of the elephant.

The subconscious parts are like the elephant, and the rational parts on top are like a human trying to ride that elephant. Okay, so if you're trying to ride a bull elephant, for example, well, the bull elephant is going to do what the bull elephant wants to do.

You can try and pull the reins if you like, and to some extent you are going to influence the elephant. But if the elephant has a strong view about what it wants to do, that's really what you're going to be doing.

Okay, now we tend to think we're more the rider and the elephant, we don't see the elephant. This is the elephant in the auction, if you like, to coin a phrase. But this is what we're talking about. How does that elephant behave? Can we understand more about that?

How maybe the auction process is influencing the elephant because the elephant's going to determine where we end up. So is the coffee actually, you know, I guess, encouraging the elephant to come out? Really, it's getting people in a bit of a mood to bid.

It's hyping up the elephant probably, you know, maybe actually. Well, there's a stimulant effect, if that's what you mean, in the cafe. You're probably right. Maybe you're waking some people up on a Saturday morning.

But I guess it's that reciprocity effect in this case that I'm referring to where the elephant now wants to bid, not because I've decided it's a good idea, but because the elephant feels an obligation to reciprocate this coffee effect.

This is quite frightening because we've just touched so far on the first bias. Because if the elephant truly is as dominant as you're saying it is, and I have no reason to doubt you because you are the scientist and I'm not. So the elephant is dominating us. Does awareness help? Very good question.

So as a general rule, I think awareness is a good first step. But awareness by itself often is not sufficient.

When I work with professional investors, for example, often you'd say, have a checklist of things so that you can go through and make sure at the time that you're making a decision, you're starting to think about this sort of stuff. And maybe you go, well, you know what?

I felt like a coffee, but I'm not going to have the coffee because I don't want to be subject to this reciprocity effect.

So you've actually got to train the elephant, I guess.

You've actually got to be aware and know that this thing's a big beast that we've got to actually consciously understand for us to be able to behave kind of emotionally or at least, you know, I guess make more informed decisions and not be, I guess, subject to the negatives of how this could affect you.

All right, let's get back to the story. Okay, so the truck's just gone. The auctioneer is sort of getting everybody together and he's about to start the process now.

He's saying, where's the effect of, look, it's not very often you get a property such as this one, the location here, which is abutting a park at the back of it. Fantastic, unique opportunity, very rare, blah, blah, blah, blah, blah.

Okay, now the interesting thing about this is that he's trying to create what's called a scarcity effect. It's quite difficult to get this sort of property. We value things more when things are perceived to be scarce. And you can, to some extent, manufacture this. So the concept here is,

You go to a supermarket, there's tins of baked beans there, there's a thousand tins, well, there's no scarcity. Until they put a sign there saying, limit five tins per person. And then you go, my goodness, I've got to get those five tins. Now it starts to seem like there's a bit of scarcity.

So how can you manufacture scarcity? Now he was doing it by trying to make sure that we understood that this was a unique opportunity.

By very virtue of being at an auction on site, there is only one property available for auction then and there anyway. So that in itself is scarcity. However, how's the difference, do you think? I mean, you didn't go to an auction that was in rooms. When you go in rooms, there's a list.

It could be up to 10 properties being auctioned in a night, for argument's sake, versus the one on site. Do you think that would play out any differently? I would suspect so because then it does seem like you've got a range of options.

If I don't get this one, I can get that one and the one after it. So maybe there's 10 rather than this very concentrated effect on one property, which, yeah, that's right. It's sort of his positioning is it's a market of one. And if you miss this, then that's it.

Your opportunity has gone. But interestingly, I mean, he used this sort of concept a couple of times during the auction. I think it's embedded in the auction process to some extent.

So for example, you're bidding and the property isn't even on the market. All right. So there's this scarcity. Well, you can bid if you like, but you can't have it.

So it's not available. And then he's also, as we get further through the auction, sort of saying, all right, first, second, third, all right, time's running out. Suddenly there's all this urgency about my opportunities are going. So there's a few instances where this whole idea of it's scarce, it's running out.

Other people might want it. I might be lost. That sense of urgency, I've seen that time and time again. And auctioneers, they don't want to call it on the market. Now, this is terminology a lot of buyers expect to hear. Okay, we've hit the reserve. We're on the market now.

Now it's for keeps. Go for it, guys. And auctioneers... They resist that because the reality is they're trying to create the idea that it's actually going to be sold at any price. And I love watching auctions, particularly when I'm not bidding, because you can see it in the auctioneer's demeanor.

I can see it in their body language, just in the whole presence with them when they've hit reserve versus when they're bluffing. But that's because I observe so many of them. And you can see it's a very clear strategy in order to create this sense of scarcity.

And I guess when we look at the property market, the negative of scarcity is we become impatient and we want to make sure that we get it because we don't think there's going to be another opportunity kind of coming up.

But generally, having a bias towards something that's scarce is generally a good decision-making rule. So a lot of these things have evolved over millions of years. And if something's scarce, try and find it. It's probably valuable. I mean, that's generally good.

But unfortunately, with some of these biases, if they're used and manipulated and sometimes apply out of context, then they can have negative implications.

In real estate terms, scarcity is something that we look for, certainly from an investment point of view. You actually want property that is scarce because that's more likely to be a good capital growth performer. So there's certain value in that.

But the idea, I think, in the last, say, five years, and we've seen a boom in both Sydney and Melbourne, is And that's when you've seen FOMO kicking big time. And that's really what this is about, isn't it?

This is the idea of I don't want to miss out on the bandwagon that everybody else is on.

And I think when you've got that heightened sense of, you know, keeping up with the Joneses or the idea that I'm missing out on something that everyone else is getting, then that's going to create an artificial sense of scarcity, right?

Yeah, and that's the problem, I think, where it's artificial, where it's manufactured, where it's not actually real scarcity. And that's where some of these sort of psychology studies can generate, can artificially manipulate people to perceive scarcity. And that's when you start to see this bias coming out.

So we've got the first one down there, which was, you know, reciprocity. And then we had, you know, the second one.

Trouble saying that?

Yeah, that's a very difficult word, 16 syllables in that one. But then the next one is scarcity. And so what's the next one you kind of, you know, you noticed at the auction playing out? Yeah, so bear in mind, I'm still pretty early stage of this auction.

He's just sort of introduced it to this stage. And the next one really is trying to get the bidding going. And what he then said was, who will get us going? You know, sort of the drill, yada, yada, yada. By the way, properties in this area often going for $2 million.

Now, he didn't make reference to a particular property that might go for $2 million. He didn't say this property should be worth $2 million. He didn't give any sort of basis for where this $2 million numbers come from.

But the fact that he's thrown in the number $2 million into the context of the auction creates what's called an anchor. Do you think that was a hint? I think it was a deliberate ploy. I think he did it very, very well. So he knows the power of anchors.

So just to give some context, so an anchor is a number that is going to draw our expectations and draw our estimates towards it. So to give you a little bit of a sense of the research, a famous study by Daniel Kahneman, who won the Nobel Prize in economics 2002 from memory.

Oh, you're...

A kick from your professor there. One of several now, by the way, I should say. But one of the studies that he's reported is a study where they spin a pinwheel. Round and round the pinwheel goes. So you see that a pinwheel is a random, effectively a random number generator.

It pops up with a number. Okay, it's 75 or whatever the number is. And then you're asked a question which should be completely irrelevant and How many African nations are there in the United Nations?

And what the study shows is that the answer to that question then is highly correlated with the number spun on the pinwheel.

Which there's no connection because it was a random number. That's right. And it's obvious that there's no connection. People see that spinning pinwheel, for example. So when you said $2 million, that was him saying, look, we want to be batting around $2 million here. We're not going to get there straight away.

We're not going to start the bidding at $2 million, but you guys should be thinking about $2 million because that's what's going to get this property. Yeah. Well, the funny thing is, I mean, almost you can just throw a number out there.

So I could sort of cough and splutter and go $2.5 million. And then you've heard me say $2.5 million. That's likely to impact the way you then make decisions.

Because some of these studies, if it's a pinwheel, if it's repeating the last three digits of your phone number or your social security number, all these sort of things are not really contextually relevant at all.

But he's found a neat way to introduce it into the conversation so it's going to play a role. Which is clever because if he doesn't do that, then we're all going to come to this auction with our own anchors.

And that anchor might be what I just sold my property for, something around the corner I was bidding on yesterday. And he doesn't know what those are. They could be high, they could be low, they could be anything.

So he's very smart from his perspective to put in something that's going to be nice and high, which tended to be a bit higher than what the property sold for, that's going to draw our estimates towards that.

I can tell you that there would have been quite a lot of background work leading up to that auction which assisted that. Because what a selling agent would do, they'll start quoting a figure. Now, there's legislation in place in all states that governs how they quote that figure.

And then the agent's got to identify who's going to be a serious buyer or who's not, right? And one of the things that they'll do, a good agent will do, will then start introducing a higher figure for them to consider. And it might be dialogue such as...

you know, we're quoting X, but the vendor would love to see Y. Or we're quoting, well, the price guide is X, but nobody's yet talking Y. But they've entered Y into the conversation, despite the fact that they're continuing to quote X. And so then the buyers go along to the auction.

And probably what's been mentioned there is Y, or maybe even a tad higher than Y, all designed to ratchet buyers' expectations up.

What are some ways to, I guess, see these anchors and then actually deal with them and actually say, well, these are just anchors getting thrown at us. How could we actually try to win that battle, I guess? Yeah.

I mean, I think the first thing to realize is that they have a really strong impact on you. So I've had groups where I have deliberately manipulated the situation.

So I've had half of people, I'll give them a high anchor, half the people, I'll give them a low anchor, and then I'll ask them an estimate of something. And in one case, I had a room full of these were investment consultants. I had a room full of investment consultants.

I said, how many people are aware that I've given you an anchor and I'm trying to influence your decision? And I had every single hand in the room was raised. Everybody was aware what I was doing. And then I aggregated up all their responses, added them all up and got an average.

And there was about a 50% difference between their different answers. So awareness in this case is not sufficient.

So you're saying that those who you'd anchored at a high figure had a higher answer and it was really obvious. Oh, 50% differential. So a huge difference. So anchors are very, very powerful.

And there's a study of real estate agents where they've been shown to work in the professional context of valuing property where you've got the vendor's expectation or not having a vendor's expectation. Does it make a difference? And the agent will say, no, it doesn't in this particular study.

But then it's obviously, it does have an impact. That's fascinating because then you roll that back to even before they start quoting, what they quote, their own biases can come into play. So this is really dig deep in this industry and it's everywhere, this anchoring.

And I think that's why it's clever for the auctioneer in this case to throw in an anchor that we're all now exposed to because you haven't seen all those different anchors. But to come back to your question, Chris, so what can you do?

I think when you see one of these anchors and you recognize it's an anchor, it's going to have a strong impact on me. Try and counter it with my own anchor that actually has a basis in the reality and the substance of this transaction.

So you're saying to do due diligence, to figure out, do enough research where you can create your own anchor rather than, you know, going by what everyone's throwing these numbers around you, I guess. Yeah.

So if I hear someone say, you know, what properties in this area are going to go for $2 million? I would go, you know what, that's an anchor. I'm going to be impacted by that. What's my alternative anchor? Well, you know what, I've done my evaluation and I came up with 1.6.

The house around the corner, that was worth 1.5. So I've got to create my own anchors in my mind to overcome this other anchor. And I've got to be ready to do that because if I don't do it, that anchor is going to impact me whether I like it or not.

With our clients, we do very, very rigorous price research and a whole dry run, if you like, of the auction before we get to auction. So we sort of try to eliminate the impact of all these biases.

But my own reaction when I hear – I guess one example is a Vendor bid as well. Another way of doing is anchoring is where there is no bidding and so they throw in a Vendor bid. Now, a lot of auctioneers don't like using these.

In New South Wales, for instance, they can only use one anyway. I think in Victoria you can actually have multiple vendor bids. What it's designed to do is actually open the door so then people will come in and bid over it.

So it's meant to sort of show that the vendor's realistic in their pricing. It's slightly different to the other anchoring where you're trying to raise people's expectations. This is actually where you're trying to show that the vendor's quite realistic and there's a property to be sold here today.

But when you don't get that vendor bid, You know, there's no guidance, you know, so that the auctioneer was using that as an anchoring tool. I don't think it's as effective as what you've just said.

But the thing too is what I've often, myself, I've reacted when a vendor bid's been put out and it's high and I've got, oh, you've got to be joking. I wonder now whether a lot of other buyers think that because I've done the research.

I know clearly what that property should be selling for. So I'm reacting from a different headspace and I've never really thought of it that way. Yeah, it is interesting because when you're going through the auction, you're going to get multiple different anchors. So he started the auction with this $2 million.

Then the bidding, I forget where it started, maybe $1.5 million, maybe $2 million. So now he's got a problem of it starts at 1.5. I think there was a Vendor bid at 1.6 after that, and then it was a bit of a delay. Anyway, as bids come through, you've got low anchors.

So he doesn't want these low anchors to then be anchoring low people's expectations. So what he did in this case is after there were a few bids, he then repeated the $2 million one again. So he's re-anchored us back up there.

And just in case you thought this was worth 1.6, no, no, no, no. Houses in this area go for $2 million. So he did it very well. So the next one I saw, and I saw several instances of it, is around loss aversion.

And the concept of loss aversion is that as we think and feel and respond to losses, we do so roughly about twice as strongly as we do for the equivalent gains. So to give you an example, if you're walking down the street, you find $50, fantastic.

You've put the $50 in your wallet, you feel good. Versus if you're walking down the street and you open up your wallet, the wind blows, $50 flies away, it goes down a drain.

The feeling of negative, of regret, of sort of the anxiety associated with losing the $50 is roughly about twice as powerful as the benefit of having got the $50.

So you're saying that the pain or the fear of the pain of losing out on the property is greater than the fear of the pain of overpaying? Well, both of those two things you've couched as being fear of pain, both as negatives.

So I would say, to give you a specific example, so when the auctioneer was saying, well, look, if you don't bid now, it's below reserve. If you don't bid now, you're going to lose the opportunity to negotiate. Now, he framed it as this is something you're going to lose.

If you don't bid now, you'll lose the opportunity. Now, he could have said, if you do bid now, then you're going to get the opportunity to negotiate. But he's quite cleverly changed the way he said that sentence.

It could have been either a gain or a loss, but he has phrased it as a loss because he knows that that type of decision making is more powerful than the gain version.

And with a loss, is that leading into someone feeling regret or is that when someone feeling, I guess, just pain knowing that they've lost out and they've missed an opportunity? Yeah, so you can understand loss aversion.

There's a bit of discussion in the literature around is it really regret or is there something else? And I think regret is part of the explanation of something going down. So we're sort of thinking about the future and thinking about negative outcomes.

possibilities in the future and they are more powerful on us, on our decisions than positive versions. I think that's the general principle. Was there any other examples of loss aversion? Yeah, he had a couple of other ones. So all sort of thinking about the power of what's been lost or could be lost.

So one time he said, look, if you don't bid, you know what, you'll wake up tomorrow and you'll find somebody else has bought your house.

That's emotive. So, yeah, you're right. I think he's trying to generate some emotion, but he's couching it as this is your house and now you've lost it. It's not like you'll wake up in the morning and you'll have bought a nice house. He didn't say that.

He said, no, no, you woke it up and, jeez, someone else is living in your house. They bought it today.

Yeah, I mean, I guess it's how much are people invested in this already, you know, and they've already... gone through the whole, there's some people have already decided what furniture they're going to get for the house and they haven't even bought the house yet.

So, I mean, the fear of losing that, I mean, we are our own worst enemy in terms of investing so much into this, getting this decision right that we can't afford to lose it.

yeah yeah that's right it's sort of it touches on sort of a this consistency in some cost effect which we'll get to in a second but i think you're right broadly it is around all this this energy that we might lose what's going to what are the downsides um so he's and and thinking about how how as an auctioneer can i create this these negative versions of the world that are going to influence people

So, and you're right. I think there are probably things I didn't observe at the auction that you've touched on that people have got their plans and they've been, I didn't even go in the house, to be honest. I don't know what a house looked like.

But so he said, you lose the right to negotiate. Someone else bought your house. If you buy this house, this will guarantee your future. Which I thought, oh, geez, that's going to guarantee my future. I said to my son, don't worry.

Any problems you thought, he hasn't been through school yet, but don't worry. If we buy this house, your future is guaranteed. So he's taking away any anxiety about the future and saying, don't worry. So again, it's not about the upside.

It's about taking away the downs, the guarantee that bad things won't happen to you. Don't worry, that's all being guaranteed. I mean, that's a huge one. I mean, if you've gone to an auction, you've missed out at one auction. You've already experienced loss aversion. You've already gone through that pain.

You've jumped in the car after missing out. You've potentially had the argument with the girlfriend or the husband or the wife. Or you're just sitting there and you're really frustrated. You don't think it's going to come up again and you've missed out on that scarcity opportunity.

I mean, Veronica, you must say that every time.

I've written about this. I've called this the most vulnerable buyer because the person that just missed out is feeling that loss keenly. And I have observed this. And I've seen so many people go and buy the very next auction, the very next property they go to at auction and they buy it.

with often zero due diligence and zero thought. And sometimes it's the first time they even saw it was at the auction. There was one couple that I saw them at an auction.

It was at one of those auctions that they should have bought it, but the other buyer just bid in a way that scared them off.

And because I was purely observing, I was able to really watch and think, oh, my God, there were so many points at which they could have interjected and could have changed things and actually should have bought that property. And I don't normally ambulance chase, but I did go after this guy afterwards.

I said, look, I'm so sorry to see you lost that. There are ways that you could have been differently. And, you know, if you need some help in the future, please call me.

Now, he did talk to me and he talked to me about a property that was coming up across the road the very next week. And I knew that property and I'd been through it and I knew it was not suitable for a young couple with a baby, which is what they were.

And I talked to him about that. And when I spoke to them the day before the auction, I spoke to his wife and she said, we will not be buying that property. And if, you know, even if we do go, we won't bid over X.

And I thought even saying we're not going to buy it, but even if we do, we won't bid over X. I thought you're going to be buying that. And sure enough, they did. But they were at a wedding the night before. And I just said, don't drink then. Do not turn up hungover.

Your guard will be down. And I know the agent, she'll pin you, she'll nail your feet to the floor. You'll abort that house. And they did. But that's actually one, I think that one part of that that really resonates with me is the hangover, Pete.

And I'm not suggesting, I don't know how many people have a hangover when they're bidding at auctions. I hate to think, but it actually does take mental energy and effort to overcome some of these sorts of things.

So generally they are designed as being shortcuts that make stuff simple for us because it takes a lot of energy to run your brain. Your brain takes up 2% of your body, but uses 20% of your energy, right? These are simple mental shortcuts.

So you want to be on your guard, as you said, to use your words. But having a good night's sleep, getting good exercise, all those sorts of things tend to mean that you're in a better position to overcome decision-making biases than if you're not.

I mean, one thing that fascinated me when you were talking about there, Veronica, in terms of doing no due diligence, you know, and as a broker, I talk clients through that decision and sometimes clients say, well, I don't really want to do the building and pest inspection because it's $500.

And I'm like, no, definitely do the building and pest inspection because it's $500 to potentially save you money. hundreds of thousands of dollars through making a wrong decision. And I think that it fundamentally touches on some cost bias.

You know, as soon as we start to invest money into the property, we start, you know, not wanting to make that money be lost or just lose out for that. So the idea of a sunk cost is once you've spent something, you should disregard it from your decision-making.

You cannot come back and get that money back. It's gone. You should forget about it. It's not part of decisions which should be then forward-looking about the amount I'm going to pay for the property and the benefits I'm going to get for it.

So the idea of a sunk cost is that we are influenced, and it links into a concept of sort of consistency, which is the idea that after I've done something or said something or behaved in a certain way, I feel thereafter that I should behave in a way that's consistent with that.

People don't like to see themselves as being inconsistent, capricious in the way that they live their lives, and they don't like others to see them as being capricious and inconsistent as well. So there's a whole bunch of sort of consistency effects in an auction process itself.

And the key one, of course, is bidding. So after I've just bid $1.5 million, I've expressed my interest in buying this property to then not go on and buy the property thereafter, for example, is an inconsistent act. I've just told you that I'm interested and now look, I'm not, I'm pulling out.

And that's obviously auctions are designed to enhance that effect. And so when you talk about we want to keep on behaving like we have been behaving, is that because of a social pressure?

Is that because of we want to just keep on, you know, we don't want to be telling all our friends we've got this amazing house that we want to buy on Saturday and we're all excited and, you know, we're going to, you know, can't wait to buy it and, you know, you're sending pictures to all your friends.

The last thing you want to do is get on the Thursday or the Friday and go, you know what, we've changed our mind. And so, you know, how do you think that social pressure and, you know, affects this? And did you notice that on the day?

Well, when you look at the research, so taking the research first, so there are different levels of the strength of this consistency effect.

So if I've just thought something, then, well, it's quite easy for me to get out of that because I haven't told anyone, did I really think it or was I thinking about that? There's all these excuses we can tell ourselves, right?

Versus if I've actually written something down, now it's there in black and white. I haven't shared with anyone now, but I can't deny that I thought it because I've written it down versus if I've then shared that with somebody else.

Gosh, now it's hard for me to get out of it because I've just told someone and they're going to hold me accountable for it potentially. So there are all these sort of different cascades.

And if I've acted on it as well, if I've just bought your pest report, for example, how silly do I now look that I've just wasted my $500? Geez, now I really have to act to make sure I didn't waste my money because that would make me look silly. for example.

So yes, I think it does link into the social aspects.

It's why they have like weight loss clubs and stuff like that too, isn't it? It's basically making people accountable. You've said you're going to do something or a fitness club, you've said you're going to do it.

Now it's out there public, you have to follow through on what you've said you're going to do. So the auction is an interesting forum for that sort of self-applied pressure, isn't it?

Yeah, I mean, you can use this stuff positively as well. So you'll see sometimes where people want to behave in a certain way, how I want to save, I want to join the health club or whatever. Well, let me set up a system that's going to force me to do it.

Because if I don't join the health club, I'm going to have a system that's going to make a donation to a political party that I don't like, for example. So I don't want to behave in a way that's going to create that.

So how am I creating a sort of a consistency effect that's going to help me to act in that way in the future? So somebody who's studied this might do that, but most of us wouldn't even consider such an interesting mechanism to get us to behave in a way that actually helps us.

Yeah, that's the power of this sort of stuff. When you rock up to the auction, there are things in your past that are impacting the way you're going to behave in the future that you might think aren't.

So it's sort of a rich ecosystem, I guess, of our decision-making that we need to be aware of.

Yeah. I mean, one thing that I always notice in markets and investing and in life generally, we are kind of sheep as humans and we just follow the crowd. And if everyone else is doing it, then we don't need to do our own due diligence.

If everyone else is buying a property, we should buy a property. Interesting. Interesting, because you say we're like sheep, but you know what? I'm not a sheep. Are you a sheep? I mean, none of us feels like individually we are sheep. It's somewhat of an insulting term to say someone's a sheep.

But I mean, collectively, that's, I guess, what the research shows is that we do tend to be influenced quite heavily by other people. But it doesn't feel that way to us. Now, in the case of property, there's a whole lot that you see at an auction.

I mean, I'm standing there with 50 other people, so suddenly there's a whole lot of social influence.

We're talking offline about the fact that most people don't like public speaking, and yet we're putting someone in a situation where they have to speak in front of a whole crowd of strangers and do something that might make them seem pretty silly if they bid too much, for example, or did they pull out when they should have done something else?

So there's quite an aspect of social pressure at the auction itself. But I think perhaps what you're alluding to is that generally speaking, what's the value of property generally? Well, it's based on a comparison of what other properties have sold for, which is pretty much what people agree.

So fundamentally, it is all sort of social driven, isn't it?

So there's so much in this bit. I mean, it's keeping up with the Joneses is one aspect here. But also, I've actually been at auctions and I've heard people say things that fits into this, right?

So I've actually heard people say, well, it must be worth that because that guy over there just bid it. And I'm like, well, what on earth makes you think they've got any clearer idea on what the property is worth than you do? I mean, that's just nuts.

And another thing I've heard people say at auction is, well, they must have done a building and pest inspection, so I don't need to. And you just think, wow, imagine putting that much faith into, A, whether they have or haven't. They could be thinking the same thing as you, for starters.

But if they did do it, have they read it? Have they spoken to the inspector? Have they actually understood it anyway? Or have they then brought in another bias that actually caused them to disrespect or disregard the – what the report said because they thought, well, it doesn't matter.

Property is going to go up anyway and it doesn't really matter if it's got massive rising damp problems. And so there's this idea at play that you are about to part with millions of dollars in some cases, even if it's just hundreds of thousands.

It's a lot of money and yet you are just going to abdicate your responsibility for due diligence because you're going to believe that somebody else has actually done theirs and you're riding on the back of that and these people aren't even people you know. They're your complete strangers.

Yeah, I mean, I guess it's one thing that kind of makes me laugh is that people will spend weeks and months getting excited about a holiday and booking the cheapest flight and researching the hotel to the nth degree, reading 100 reviews and doing everything they possibly can to make this holiday the most amazing experience.

But when they come to their property decision... You know, they speak to the guy at the pub, their friend's friend or et cetera, and they rush and they want to make that decision extremely fast just to get it done. Well, I saw a few instances of it.

So the auctioneer, I think, in the case I went to was very clever in using some of this sort of stuff to his advantage or trying to overcome it where it was working perhaps against his advantage.

So, for example, we got to a point where I think we had an opening bid of 1.5, then a vendor bid of 1.6, and then it was all quiet. So the problem the auctioneers got at this point is that the social influence is working against him. There's 50 people here. Nobody's bidding.

Wow, it seems like everyone thinks this property isn't worth buying. That's what the social influence would say. So he has to overcome that in this case. So he did, I thought, quite a clever trick.

He was there, by way of context, he had about, I don't know, maybe three or so assistants who were helping him on the day.

And so he's countering this idea that we've all decided that the property isn't worth buying with the idea that actually, you know what, the bidding is not reflective of what everybody thinks.

And he did that by saying, look, if nobody bids here, well, we still know the property's worth a lot because I know that, Bob knows that, Sue knows that, Mary knows that. And he sort of listed off all the people.

Hey, look, no, there's social influence saying here that the property's worth a lot. It's just not reflected in the bids. So he sort of had to try and overcome it. And that, I think, was a good case of what can you do against when this stuff is not working with you.

And he did it very, very well. And he had a couple of other cases as well where he's tried to use social influence. And he did it sort of an off-the-cuff way in a couple of cases.

One, he said, oh, look, after you've won the auction, you can go down to the local pub and you can celebrate with your mates. So he's creating, I guess, that image in our heads of the social sort of benefit of my mates congratulating me about my wise purchase.

But he also did other things that were quite subtle. So when they were down to a couple of bidders and he was looking at one of the bidders going, oh, do you want another 5,000? Do you want another 5,000? So he's looking at this person, he's smiling and nodding at the same time.

So, I mean, this links into, we've got these things called mirror neurons. So when we see somebody doing something, it's almost as if we are doing it ourselves. This is how we learn as a social animal.

We have this mirror neuron, these mirror neurons that mean when I see someone smiling and nodding, I sort of am inside smiling and nodding as well. So he's almost greasing the wheels for me to smile and nod at his $5,000 suggestion by smiling and nodding at me.

So he did it very, very well.

When we were talking about anchoring, what occurred to me was that auctioneers anchor in another way, not just putting out there a figure that people might need to be thinking about, but actually the actual size of the bids.

So early on in the auction, they'll be saying, right, well, I think the next bid should be $50,000. And I've watched people and they're like, okay, then there's 50. I mean, it's like there's no rule that says you have to bid 50. You could bid 63. Or you could bid 25.

They can reject your bid. Somebody else may bid it. But there's actually no rule that you have to follow these instructions. And yet, so many people do follow the instruction. And they'll get smaller and smaller. There's all this nonverbal stuff in that too, right?

Because it's giving clues that you're getting closer and closer to being able to purchase the property. And as the bids get smaller and smaller, I mean, what's going on in a buyer's head then? Well, I think you're right in what you're saying in that there's no rules here.

So you look at sort of the rational world, and this is sort of where economics started more than 20 years ago. It was sort of an economic theme was how we all act rationally. And in a rational world, you would make whatever bid increment you wanted. You would start wherever you wanted.

Why would I bother making a bid below the reserve when I can't possibly buy it? None of this sort of stuff would take place.

So in an uncertain world where there aren't defined rules or aren't defined bid increments or valuations, that sort of stuff, then we do look for simple shortcuts, ways of cutting through that complexity and what other people do, what other people say, what the suggestions put to me, all these things are powerful influences in how I'm going to respond.

So yes, we're going to be influenced by all those sorts of suggestions. And really, it takes a lot of mental effort to overcome them in many cases. So you know what? I'm not going to put another $50,000 on. I think $27,451.27 is my limit.

And I'm going to stick to it or whatever it is.

So would you say that the auctioneer up there was kind of like a circus leader, more like it? You know, you've got all these elephants running around and, you know, and all acting in strange ways.

And he's up there, you know, in front and he knows what's going to, you know, make all these elephants get all excited, etc. So, I mean, fundamentally, that's what an auction really is, isn't it?

I mean, one thing I've noticed at a few auctions is kind of the recency effect, which is, you know, we kind of behave on what the news is at the time.

And, you know, I've had, you know, real estate agents send me research what's happening in the market, like infrastructure projects and, you know, big spending and the property market's gone up 30% last year and all these kind of recent positive news. Do you think that that plays out?

And did you actually notice any of that on the day? Well, in one case, so generally I would say yes. We tend to, when you look at the research, we tend to be influenced by what is vivid, what is imaginable, what is tangible. And our recent experiences tend to be all those things.

I can understand and experience and I can remember what's happened in the last five years versus, you know what, I don't remember living through the Great Depression in the 1920s. Do you?

I don't know how old you are, but you don't look like you're old enough to remember that one. So yes, I can read about it, of course.

Yes, I can see it in the data stream if I go back far enough, but it's not going to influence me nearly as much as the most recent experience. Now, in the case of the auction I attended, the auctioneer did make a reference to this sort of recency effect.

I mean, he said at one point, this property will go up. And there was a bit of a pause and I thought, oh, geez, I mean, if he's going to write a written guarantee, I'm happy to buy this property. I'll sell it back to him in 10 years if it's gone down.

But then he caveated and said, this property will go up based on other properties, recent experience of other properties in this area. So he's trying to leverage that effect. He hasn't said, you know what, over a hundred year period, sometimes it goes up, sometimes it goes down. That wasn't what he said.

So he's trying, I guess, trying to create that sense of recency in this case. It's a positive effect, of course. Humans will generally think that, you know, the last 12 months of returns are going to be similar to what the next 12 months of returns are going to be.

And it just defies common logic. You know, if something is going up, it means that it's probably going to go slower in the future. If it's gone slower, it's more likely to get speed up. And, you know, it's just the odds.

But unfortunately, you know, they love to play on this, you know, recent returns. And that's what you should expect is the same returns longer term.

So when the bidding slowed down, though, how did the auctioneer get more bids and actually bring it to a sale? How did he get more bids? So it's connecting with the mental accounting. So let me just introduce that concept.

The idea of mental accounting is that we apportion in our minds different buckets of money. So the idea here is if my salary goes into one mental bucket, it might go into a different physical account, of course, but mentally I think about my salary in one bucket.

If I've just got a bonus of I just found some money on the street, this is a win-for bucket. We behave differently depending on which mental bucket we put these two things in. Now, of course, a dollar is a dollar is a dollar. It should all be the same.

We should all get put in the mix, but that's not how people respond.

So one thing the auctioneer did to try and leverage this concept, and he did this again quite cleverly, is the idea that if we have a bucket for investments, we're much more able to understand that that is something I can invest more heavily in.

It's an investment versus something that is a consumption that seems like it's more frivolous. So if I'm buying a bottle of wine and I'm going to put it in my cellar for a while, you know what, that's an investment.

Versus if I buy a bottle of wine to drink, well, you know what, that's a consumption. So I'm not going to spend so much on that one. Of course, the one in my cellar, I'm actually going to drink it probably.

So it's all sort of how we create these buckets in our own mind. Now, he used it in the auction by saying, by couching the purchase in terms of investment. Now, I don't know people in the auction whether they were there to purchase that as an investment property versus as owner-occupier.

But by couching in terms of an investment, even if I am planning to live in it, he's trying to leverage that bucket which we have more willingness to spend.

People often assume that investors are going to be more careful when they bid for a property than an owner-occupier, but this might even lend itself to an owner-occupier not being or being more careful than an investor because they're not seeing it as being as sensible or they're worried about the emotion playing a part and that concern about emotion might cause them to be more cautious.

Yeah, maybe, but often these things offset. So if it's, yes, my mental account is that this is a consumption, but that might be offset by, you know what, it's a really fantastic property and oh, I'd so love to have it.

Sort of the emotional stuff that we haven't really touched on in a huge amount, but this is the elephant again, right? The elephant loves it. For example, it doesn't really matter what the rest of me thinks.

So what we've gone through, I guess, today is sort of six or seven of the big things. And we really need to be careful, I guess, is where those six or seven things point in the same direction. Compound. That's right.

So if something is framing can make a difference, if it's framed as a loss, it makes more of a difference. So this is, I guess, perhaps where the checklist comes in.

If all the things are pointing in the same direction, that's when the alarms and the bells should start ringing versus if sometimes they offset each other, then maybe it doesn't matter so much.

Yeah, I mean, one thing I always notice with the property markets is people get into the debate around property versus shares, right?

you know, why would you buy a property when it's paying a 3% yield and, you know, you've got to pay $1.2 million for it. You know, it's just not a good investment, et cetera.

One of the things that does affect the property market compared to the share market is that people are actually buying it for a lifestyle and people are actually putting a value on that. So their mental accounting, they're willing, they've already made a million dollars in property.

So they're willing to put another million dollars into property to make another million dollars. But even in that case, so there's a couple of other biases there.

One is if I've just made a million dollars on my last property, okay, so here is this mental account of windfall gains that I'm now more willing to spend, for example, but also the affect or the emotional content then.

How good do I feel that I just made a million bucks on my property that I just sold? I'm feeling awesome. And when I'm feeling awesome, I'm more likely to go spending on things and having a good time versus the compounding effect of I just made a loss on this.

Am I going to go out and be aggressive and buy the next thing? Well, no, I'm not. I'm going to do the opposite.

So really in the past five years of boom in Sydney and Melbourne, I mean, we've seen that to great effect. So people who may have sold and got a lot more than they expected then go out, bid with, you know, over exuberance or overconfidence because of this sort of mental accounting idea.

I've got an extra $300,000 that I can blow really because I didn't expect to get it in the first place. But I think I observe, and tell me if this is right or wrong, Simon, you know, I observe the ways in which people bid. And I think to myself, they've forgotten.

So say for argument's sake, the bidding's up to, say, $800,000. And the auctioneer's encouraging them to bid another $500. It's a small increment. And it's almost like I think they've compartmentalised and they've said, right, $800,000 doesn't exist anymore. I'm only bidding $500. Yeah.

And I know the auctioneers try to get them thinking that way because they say, what's another $1,000 or what's another $500? And I keep thinking to myself, add it to what you've already bid. But it does seem to be that bidders respond to that. Would you say that you saw that in effect?

Certainly. If people are compartmentalizing these amounts and only focusing on the small incremental amount and the rest is maybe seen as a sunk cost or it's part of this whole consistency effect, then, yeah, it becomes easier, doesn't it, for $500 extra? Yeah.

I mean, when we're talking about mental accounting there, is that potentially leading to something Veronica just mentioned there is overconfidence? When people talk about overconfidence and when psychologists define overconfidence, they're sometimes thinking about different things. So one of it is this sort of better than average driver effect.

You ask people if they think they're better than average. Yeah, 80% of people feel that they're better than average drivers. There's a whole lot of things that could happen here. I think I know what's going to happen and I'm pretty confident that that thing is going to happen.

Whereas actually there's a whole range of things happen and we get surprised more often than we think. So that could be, I think the property is going to go up 20% next year. We tend to be too precise versus what often is called over-optimism, which is just being too positive.

I mean, that's a really good point there. It's over positive versus over confidence. And, you know, that's a bit of a learning there for me, actually, because what I thought was over confidence was actually just people being overly positive. And so, you know, the over confidence is probably the over confident investor.

You know, you've done all right. You've bought a couple of properties. And I noticed that a lot with a few investors for the first time just recently is that they bought an investment property and because the whole market's gone up, they've become overconfident in their ability to be a better investor.

And really, I think what they really need to understand is that it wasn't that they made an amazing investment decision and that they're an amazing investor. It's just because the market's moved and then they've been on the wave.

And so, you know, and then they're overly positive for that property in the longer term because it's done well in the short term. So, I mean, that's a really, really clever way of looking at it. And yeah, I mean, that's, that's, that's, it's marvelous.

Yeah, part of that, I guess, is how we receive and respond to feedback. And we don't do it very well. So that's how we should learn. Now, the situation you described, I bought a property, it went up, I made a mozza, I'm an awesome investor. That's sort of the conclusions that you draw.

Versus when the opposite happens, we don't come to the same, the reverse conclusion. I bought a property, it went down, I lost money. Is that because I'm a really terrible investor?

oh no, you know what, I was just a bit unlucky and this happened and the council approval didn't come through or whatever it is. There's a whole bunch of things that will get in the way of me learning from that experience.

So we tend to systematically learn the good stuff and avoid the bad stuff, which just continues to make us more and more overconfident.

I often meet people who did really well on their first property and they didn't actually know why or how they did well. It was an accident. And then they think that they're going to replicate that success. And of course, they don't know what they were doing.

So they think they know what they're doing, but they don't.

Yeah, I think that's, you know, unfortunately, a lot of clients will come to me and they've already got a few properties. And, you know, before we start thinking about going forward, we always got to think, well, what do we actually own now? Have we actually got quality assets?

And, you know, what I'm always noticing is a big biases towards not selling or thinking that a property that's maybe not performing very well is going to turn around and become an amazing performer. Some cost. Yeah.

And I mean, I think with investing, there's a definite bias there where we hold onto the properties because we don't want to lose and we hold onto the properties that aren't going to ever go up because there's just fundamentally something flawed with them.

And then we sometimes sell the best properties because we want to cash in and feel good that we've made money. So, I mean, what bias is that? Well, it's called the disposition effect, but it's grounded in loss aversion. So I don't want to sell something that's gone down because that crystallizes a loss.

It doesn't feel like a loss until I've sold it. So I haven't really made a loss. It's still sitting there. Oh no, it's only a paper loss. It might come back up. All right. So I hold onto that thing and this

as we observe in share investors as well, versus the one that's gone up. Jeez, when I crystallize this, I've made a mozza again. And so I feel good. I've made a profit. I can tell my mates about how successful I've been.

And so we tend to sell the stuff that's gone up and hold the stuff that's gone down. And in the context of share investing, where you can measure this stuff perhaps more precisely over large scales than you can with property investing, it's called the disposition effect.

But you see it in property investing, I guess, because when markets go down, volumes dry up. People don't want to sell at a loss. So you still see the same sort of dynamic. So thank you, Simon, for sharing everything today. And I always like to ask people, where can we do further learning?

What more can we learn? And a great way to learn is via books. And I believe you've just written your second one. Can you tell us a bit more about that? Oh, you've come to the right place.

Yes, I have written a second one. It's called Cyborg, How to Optimally Integrate Human and Machine Investment Decision Making.

It's a bit of a mouthful, but really the idea is how do you take the things that machines and AI and machine intelligence, machine learning is good at and combine it with the stuff that humans are good at and create combinations of humans and machines?

And without giving it away, you know, can humans and machines work together to get a better outcome? Or should we be fearful of the machines?

so really it's about working out what the flaws are in our decisions and this is sort of stuff we've covered today versus machines and they're good at some stuff but not so good at others and the combination I guess again it's saying to people you shouldn't be fearful of machines because really if you just combine with them you can do better than machines anyway so it's that the optimal solution long term is the man with the machine or even sometimes a woman with the machine yeah

You mean mankind, you don't mean... Humankind. Actually, there's a chunk in there about sort of diversity and how you can combine teams of people with machines, sort of cyborg teams as well. But that's it, effectively, bringing people and machines together to do better than one by itself.

Well, I'm going to read it, and thank you for my copy. We will put the link on the website in the show notes so that you can also buy the book. Don't stop at one. LAUGHTER Thank you so much, Simon. Great to meet with you and talk today. Thanks a lot.

Thanks for having me. If you have a question that you'd like us to answer in an upcoming Q&A episode, you can send us a voicemail or written question via the website, theelephantintheroom.com.au, or you can email us directly at questions at theelephantintheroom.com.au.

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