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Confirmation Bias

Check the transcript of the video here:

Hi, I am Imran Amjad, senior financial adviser at Veurr Financial Planning. Today, I will be explaining Confirmation Bias and sharing a story with you of a client of mine who got stuck in his own confirmation bias. So, what is Confirmation Bias? It’s a behaviour where someone develops a preconceived belief towards a certain theory or perhaps an investment strategy. They tend to ignore any counter arguments. They may also seek a professional to confirm this bias so they can continue on their preconceived path.

Now, about my client, Harry. A few years ago during one of our reviews, he brought in a chart showing property growth for the last 20 years and said, ‘I am going to buy a townhouse, the value will grow exponentially, isn’t that a great idea?’

I said, ‘Harry, the information may be correct, but I know the goals that we agreed upon and I understand well, for instance, your: current liabilities, income, cash flow and long-term goals. ‘This isn’t for you, yet.’ No, no, no, he says, in my community circle, everyone has 2 or 3 properties. And he said his brother was getting one as well, so he didn’t want to miss out.

I said, ‘Harry, I don’t know about them but I know your circumstances. ‘Have you considered: What if you lose a tenant for 6 months? What are the maintenance costs? What happens if interest rates rise?’

He searches and shows me another article on his phone, suggesting interest rates will stay lower for a decade at least. Yet this was current information only – as we have seen recently, financial landscapes change, and sometimes they change very quickly. Reluctantly, Harry promised to think about it more before doing anything.

On our next review, Harry seemed a bit distressed. He went ahead and bought the townhouse with his maximum borrowing capacity. During the pandemic, his tenant could not pay the rent for 3 months. Agent, tenant and maintenance costs had crept up since then. I asked him, ‘Harry, what happened to our discussion? You were going to think about it.’ Harry said he didn’t want to be left out of the property boom.

This time, Harry has brought more information with him that suggested property prices would increase post-pandemic with low vacancy rates predicted. I reminded Harry: ‘Regardless of these predictions, your income hasn’t changed, you have increased your liabilities and your long-term wealth creation is at stake.’

A few months later, Harry calls and sounds anxious.

Without heeding my advice, he had gone ahead with a ‘home and land package’ this time. He made a deposit just before the interest rates started to hike. Property prices came down and the future repayments doubled in a matter of a few months with reduced borrowing capacity.

He faced uphill struggles even on the current loans. He lost the preconceived growth even before the property was built. As his Confirmation Bias was shattering, he was struggling to comprehend his situation.

This scenario shows how some people can get carried away under their Confirmation Bias. My role as an adviser is not only to guide my client towards their financial freedom but also educate them along the way in making better decisions that are free of confirmation bias. Avoid disastrous results. Take a balanced view with expert advice.