What are some of the cognitive biases that we have, under this
idea of behavioral finance, that impact us as syndicators as fund
managers, this is part two of a six part series that we're doing
on behavioral finance. So this part is broken into, there's
going to be three parts total. So the first part was just that
first video to go through what is behavioral finance? The
second part, which is going to be comprised of three videos
itself is going to go through what are the cognitive biases
that we have? And then that third part is going to go over?
What are the remaining? What are the remaining six different
kinds of emotional biases we have, I know you're going to
like this series, this is part two, we're going to start
talking about cognitive biases.
So we're talking about cognitive biases. So these are biases that
are faulty decision making. So it's a fault in our error in our
in our ability to make a decision properly, it's an error
in the logic itself. So it's not in anything that's emotional.
It's part of the rational part of us that we're trying to use
to apply to make rational decisions. But an error occurs.
So there's, there are total of nine different of these biases.
And we're going to go through three of them. So let's go to
the whiteboard. So these are these are the nine different
biases that there are in the cognitive space. So today, we're
going to talk just about these first three. So we're going to
talk about conservatism. We're going to talk about
confirmation, and we're going to talk about control. We'll talk
about the other ones in the next videos. So what is conservatism?
So conservatism is a cognitive bias. It says that when we get
new info, that we ignore it.
So you get new info, and then we choose we choose or for whatever
reason, it's ignored. Now, if you know what the Bayesian
framework is, so Bayesian framework is saying, well,
there's this many people in group A, and that may end of
that. There are also this many in Group B. And we know that
there's this likelihood of these events occurring, it's actually
a very formal process where we can actually figure out what any
statistic is based on the sets that we're using. So it's, as a
new element gets added to that as a new pool of resources as a
new statistic or something new, something that should shift our
analysis. We're discord we're discounting it. So it would be
to not pay attention and not factor it in. So it's saying
that we're going to maintain original analysis. And that's
what conservatism is. So it's taking that idea of, okay, new
information is coming in. But we've already made that
decision. So you're you're discounting information only
because you've got, you've already got the existing the one
in now similar, but different is this idea of confirmation bias.
And you might have heard of what confirmation bias. This is
certainly one that I think a lot of syndicators have, I know that
it's something I have to watch out for myself. So it's almost
all of us have it. It's very, very prevalent. I certainly am
very guilty of it as well. But it is part of something that I
actively try to stomp out and myself because it is so readily
present there. It's just such a natural tendency to do. So
confirmation bias says okay, I've identified this thing as
this thing. Right. And when new information comes in
let's actually go We'll use it. So
as new information comes in, we're getting this this line
here that saying we've got a coming in. Okay, that's good.
Yep. See a, put that down on our list. As another reason why.
Okay, we got this second one. It's another vote for a. Let's
put that down as another reason why, Oh, we got this thing in as
B. All right, get rid of that. All right. Okay, another piece
of information is coming in. It's a great, let's keep it
another piece of information coming in. This one's B. It
that's an All right. So it's a. So it's the confirming, right?
So it's taking in all the information. Unlike
conservatism, it's taking in that new information. But it's
only accepting that information that confirms what our original
analysis set. So very, very prevalent out there, right? I
mean, it's certainly something that's there, it's really hard
to change our minds. I'm sure that you see it in, not just in,
in an analysis of a building or analysis of a, of an
opportunity, or some sort of offer you're putting together,
but you certainly see it in politics, or you certainly see
it and mediary certainly see it and all sorts of things, that we
take this idea, and it doesn't matter what other ideas are
coming in, we automatically gravitate naturally, to confirm
our original idea. We don't want to change, we all have it. When
it comes to putting doing a syndication or a fund and an
asset management though, new information is coming in all the
time. And Facts are facts, right. So I can't ignore the
facts. But I do, right, because if it's if even if it's, if it's
contradictory to what I already want it to be, I'm gonna ignore
it nine times out of 10 If I'm not careful. So that's the
confirmation bias. It's really, really dangerous, and so
prevalent out there. So think about that. And then I started
thinking for in your, in your own life, where do you have
these issues about confirmation bias? I bet you have them. This
third topic of a cognitive bias is what we call control bias. So
this is the the the thought that, that we have more control
over something than we actually do. So what this is, is, say
you've got let's use real estate for an example. And say, in this
town, you've got, you know, you've got 1-234-567-8910 Let's
actually delete this one, and move it over there. All right,
you've got it you've got 10 minutes you've got about nine
buildings. Here we go. Now 1010 domains, right. Now a new one
pops up this circle, we can see which one it is. Let's do one
pops up. Well, you've got 10 other buildings, and they're all
surrounding this building. And so surely you have you, you
know, the city council. Right, you know, everybody there, you
know, all the tenants in the area that are going to come you
it's the control is the the misbelief that you have that you
have control over just this area. That anything that happens
within here, you have some sort of leg up on the competition.
Now what this does is it over develops a concentration in this
area. So the control bias says okay, it's this. So a lot of
people will will ask me what what I syndicate when I
syndicate a pro or D or I do I do a syndication? I'd make it
pretty clear. I don't actually have an asset type that I stick
due, it's not part of my fit. It's just not what I do I care
about good deals, right? I have a whole laundry list of what
kind of fits in my in my fit and a very clear explanation of it.
But one thing that is not there is asset type. asset type is not
there. Why? Because of this illusion of control. So, that's
one where I've left this idea of control. And I use that as an
example. Because a lot of people think the other way, they think,
Well, I am a master of mostly what we see as multifamily. I've
been doing multifamily forever, it's got I've got, you know, $15
trillion, under, under my management, I know everything
about it, I've got control over this, I'm gonna keep doing this,
I am the best there is at this. And you may be you may have
absolutely some special skill. But it also is an illusion of
control. Because it also may, you may make assumptions that on
your risk profile because of these other 10 buildings that
are here about what's going to happen here. Because of you have
this belief that you have control over.
So those are the first three of our cognitive biases. So
conservatism, confirmation and control. In the next video,
we're going to go through the next three, which is
representativeness, framing, and hindsight. So those are the next
three cognitive biases that we're going to go through. My
name is Tilden Moschetti. I am a syndication attorney with the
Moschetti Syndication Law Group. coming to you with this six part
series also, because I'm an active syndicator and fund
manager just like you. So I am a lawyer, I put, we help people
put together 506(b) and 506(c) offers, but I also put it
together my own deals. And so with these behavioral
biases that we have, they're certainly present in me as well.
And I thought it would be useful to make sure that we conveyed
those to you as well, because I'm sure you'll find them
useful. And ultimately, what we're all after as the same
thing, get better returns to our investors, so they keep
investing with us. We can make the most amount of money that we
can, they can make the most amount of money. Everybody's
happy. It's a win win.