This is the second part of cognitive biases, we're gonna go
through three more cognitive biases. And this is part three
of a six part series on behavioral finance. Why are we
talking about behavioral finance because behavioral finance
shapes what we do as fund managers and as syndicators.
It's the assets that we acquire and the analysis that we go
through, get swayed by our own natural behavioral psychology,
right. So those things are absolutely true, they happen.
We're not purely rational decision makers as much as we
want to be. So in this series, and what this is going to do,
it's going to talk about that second three set set of three of
the cognitive biases. In the next video, we'll talk about the
last three, and then we'll start talking about what those
emotional biases
So in our first video, we talked about what behavioral finance,
in our last video we talked, began talking about what our
cognitive biases are. So let's switch to the whiteboard and see
where we're at. Here are the biases. So last time, we talked
about conservatism, confirmation and control. And this time, we
are going to talk about representativeness, hindsight,
and framing. Our next video will go through anchoring mental
accounting, and availability. So let's go through hindsight,
representativeness, hindsight and framing, what are those and
what's going on? So representativeness is the idea
that the past will repeat itself. So it's a false false
belief that the past always repeats itself.
This is why you'll see on when you look at the website for any
kind of investment, a lot of times you'll see, you know, past
results do not indicate what was gonna happen in the future.
Right? It's not indicative of that. Because what happened in
the past doesn't always repeat itself, right? I mean, you
certainly have events that change things radically, the
market forces itself or changing the past, or changing what's
going to happen in the future. But aside from that, we have
black swan events, we have other things that are always changing
it. It's what this causes it to do is it causes investors to
invest in hot investments. So you'll see massive trends and
towards certain things. Like we always see people going into,
into, okay, right now, self storage is really hot. And so
people are flocking to self storage. Next, it might be data
warehousing facilities, again, it was like that before, maybe
that'll come back. And it'll be hot, because we've got aI hot,
and maybe that'll be the next thing. Not sure. But whatever it
is, it causes people to see, they see great returns, and so
they think, okay, that's the next great return. Right? So we
can go to that, again, it's going to repeat itself. One
thing that I oftentimes saw was where my office used to be in
Los Angeles. So I would hear constantly about why to invest
in multifamily because it always in the market, and you would
hear it pray this way. The market always increases the
multifamily at a, at a much greater pace than rent growth,
rent growth, getting prices at about two or 3%. But the
appreciation on properties always appreciates up 5%. That
is a pure example of representativeness, that what
may have been a historical trend, but it does not fertile,
what's going to actually happen? Because at some point, it's
going to change, right? I mean, at some point, well, if rent
growth isn't this appreciation is going to have to slow down at
some point because it's not going to trade at 50 billion
times what the rent is, right? It's just not going to happen.
So there's a point where we can't see cap rates get pressed
down anymore. That's one example of where it happens. But you
certainly see it in other areas as well. So you point to well,
you know, right now, AI is very hot, right? So an investment in
AI into an language model. Open AI is now valued at 83 billion I
think it is. So the next language model we should
certainly invest into because it's also going to be at a
evaluated at 3 billion, but that's just not true. Right. It
may be valued more might be valued less might be valued and
nothing, I don't know. But it's that representativeness that we
need to get away with, we need to actually do the financial
analysis not rely on past results. Now past results can
help influence us, right? It can say it's a data factor that we
should combo that we should put in. But it doesn't mean that
it's always going to happen. We can't use those as placeholders
without thinking through them as placeholders. All right,
hindsight. Hindsight, is always 2020. That's exactly what this
means, right? So it could be that your investors say, you
know, you are the best syndicator in the world, we
always make, make 30% IRR. Well, yeah, you may be I knew it going
in, because, wow, now we made 30% I knew we were gonna make 30
I knew it. I knew it was gonna be 30. I know that you were
saying it was 20. But I knew it was gonna be three. That's an
example of hindsight bias. That's a saying, well, that,
that the future was predicted, or that the current state was
predicted by you know, I that you knew it before, when you
didn't know it before. Really. I mean, that's why it was there.
So it what this does is it creates a false sense of
confidence. So it decreases the perceived risk of what's going
to happen. And that's, that's something that needs to be be
thought through. So when you're choosing an assets, or when
you're choosing assets to buy, are you relying on hindsight,
are you relying on? Are you saying that? Well, I know that I
should just keep doing this, because just like
representativeness, you know, it's always been this way. And
then you tell the investors? Well, we knew it was going this
was going to happen, because it happened? Well, you can't really
do it that way. That's illogical. So I'm going to put
this as the hindsight is 2020. Problem. All right. The third
one is called framing. So framing is it's a tendency to
interpret information, not based on the pure information itself,
but based on its source and presentation. So let's say you
have two opportunities you're looking at. Right? This one
hired best marketing team in the world.
It looks so great. Oh, my goodness, this brochure is
amazing. It's got like 3d photos on it. And it's got, like,
there's a video player that opens up and it just looks
amazing. And they hired James Earl Jones to do the voiceover
for man. It's a great, great, great asset. And this one looks
just like it's been written in crayon. And so you automatically
make the decision that okay, I'm going to adopt this one, because
surely it's better. I mean, they hired the marketing team in
order to put it together. And James Earl Jones did the
voiceover. It's great. And I look at this one, when the
information may have been way, way, way better in the in this
one. So framing is that bias that we take place that based on
the frame, think like a neuro linguistic programming
definition of frame, so the lens that we're looking at it
through, that's what we choose to gravitate to, we tend to
filter things out based on that and not look at beneath the
surface and say what is the actual information that's being
portrayed here? And how reliable is actually the information? Not
the package for the information? Right. So a five year old may
say, this is a great investment, but he hires James Earl Jones,
it's gonna be very, very different than you've got, you
know, a ccm with, you know, 20 years of experience in doing
syndications and knows everything about the market and
finance and everything in there. Also a CFA you know, what we
discounted because the package isn't nice. So that's what the
the framing bias is. My name is Tilden Moschetti. I'm a
syndication attorney for the Moschetti Syndication Law Group.
I'm also a syndicator and a fund manager just like you. So part
of what I bring to my practice is the legal documents and all
of those things. Absolutely. But kind of also why I'm putting
together this video is because as a syndicator, as a fund
manager, I understand the issues that you're going through. I
know what sort of things come up. And these these ideas of
behavioral finance absolutely come up, how do I know because
they come up for me. And so if they come up for me, I'm certain
that they come up for you. And I thought it would be helpful for
us to work together and define what those are. So that way we
can stomp them out. Ultimately, we we take control we mitigate
the damage caused by these emotional and cognitive biases.
What happens in the end, our investors get better results,
you get better results. It's a win win across the board. So
again, my name is Tilden Moschetti, Moschetti Syndication
Law Group