21st Annual Conference of the European Real Estate Society

Heuristic-driven bias in property investment decision-makingin South Africa

by

Dr GA Lowies - Prof JH Hall - Prof CE Cloete

This paper is kindly sponsored by the IRE/BS Foundation for African Real Estate Research

TABLE OF CONTENTS

• Introduction• Literature & previous research• Research method• Empirical analysis and results• Conclusion• Recommendation• Contact details

INTRODUCTION

• Behavioural finance • Behavioural research on the property market & research

problem (Hardin:1999 & Kishore:2006) • Aim/Objective of this research

To determine the influence, or not, of anchoring and adjustment and subsequent herding behaviour on property investment decisions

Focus: Property fund managers of listed property funds

• Difference of this research Sample Emerging market

LITERATURE & PREVIOUS RESEARCH

• Introduction• International studies

Tversky & Kahneman (1974); Edwards (1982); Welch (2000); Shefrin (2002); Cen, Hilary & Wei (2010); Kudrayavtsev & Cohen (2010); Jegadeesh & Kim (2010); Lin (2011)

Findings: 1. Tendency to stand with anchor value2. Lack of understanding of new information3. Herding behaviour exists

Northcraft & Neale (1987); Gallimore, Hansz & Gray (2000); Leung & Tsang (2011) – similar findings as above

No South African studies to date

RESEARCH METHOD

• Sample characteristics: Fund managers of listed property funds; South African based; actively

traded; 27 funds (29 fund managers)

• Research design & instrument: Survey-based design using a questionnaire

• Questionnaire: Decision-maker profile; fund information; anchoring and adjustment; herding

behaviour

• Statistical analysis: Basic descriptive analysis; Fisher’s exact test

• Response rate = 59% (80% market cap representation)

EMPIRICAL ANALYSIS & RESULTS (1)

Anchoring and Adjustment•Property choice (anchoring):

Majority of respondents (76.4%) choose property C

)

Property Frequency Percentage

Property A – Average return; low risk

4 23.5

Property B – Average return; high risk

0 0

Property C – Above average return; moderate risk

13 76.4

EMPIRICAL ANALYSIS & RESULTS (2)

• Property choice after the introduction of new information (adjustment):

Property A the more favourable choice given the new information 85% of respondents that had previously chosen property C, stays with property C.

Property choice Frequency PercentageYes, Property A: 70% probability higher return than property C; 30% probability lower return than Property C – following financial year; same risk profile.

4 23.5

Yes, Property B: 50% probability lower return than its current return; 50% probability higher return than its current return – following financial year; same risk profile.

1 5.8

Yes, Property C: 70% probability same return than its current return; 30% probability lower return than its current return – following financial year; same risk profile.

1 5.8

No, my decision stays the same 11 64.7

EMPIRICAL ANALYSIS & RESULTS (3)

• Change to the investment decision of the competitors knowing that the competitors invest for the wrong reasons

No irrational herding

Decision made Frequency Percentage

Yes, I would change my decision to that of my competitors.

0 0

No, I would continue with my original investment.

17 100

Not sure 0 0

EMPIRICAL ANALYSIS & RESULTS (4)

• Change to better informed competitors’ investment decision in relation to the change in the initial investment decision

No statistical significance although 52.9% of respondents would not change their initial investment decision even if their competitors is better informed

No rational herding

Change to the better informed competitors’ investment decision

Change in the initial investment decision

No Yes Total %

Yes 4 3 41.1No 6 3 52.9Not sure 1 0 5.8Total N = 17 11 6 100Fisher’s exact test: p=0.999

EMPIRICAL ANALYSIS & RESULTS (5)

• Change to competitors’ investment decision because of a degree of uncertainty in relation to the change in the investment decision due to new information

No statistical significance (p>0.05) Slightly higher than previous result – no rational herding

Change to competitors’ investment decision because of a degree of uncertainty

Change in investment decision due to new informationNo Yes Total %

Yes 0 2 11.7No 8 3 64.7Not sure 3 1 23.5Total N = 17 11 6 100Fisher’s exact test: p=0.24

CONCLUSION

• Aim: to establish the influence of anchoring and adjustment and herding behaviour on property investment decisions.

• Anchoring and adjustment: Consistency with results of Northcraft & Neale (1987); Kudryavstev & Cohen

(2010) and Leung & Tsang (2011). Disregard the fact that new information deemed the original anchor less

favourable. Bias may exist due to extreme conservative outlook

• Herding behaviour: In contradiction to Northcraft & Neale (1987) and Lin (2011) No statistical significant results

RECOMMENDATION

• Restructuring of normative framework to incorporate behavioural factors.• More in-depth empirical investigation on a larger sample – comparative

study.• Investigating the decision-making environment to understand the socio-

political barriers.• Government influences on investment decision-making.

CONTACT DETAILS

Dr GA LowiesDepartment of Financial ManagementUniversity of Pretoria, South Africa0002

+27(0)12 420 3404+27(0)76 858 2671braam.lowies@up.ac.za