I’m always amazed at how rational, professional clients can make seemingly illogical decisions when it comes to the process of buying or selling a home. When faced with facts and statistics that should lead to a comfortable and informed decision, the most intelligent clients still let fear and uncertainty dictate their choices. Why does this happen?
Herding Impulse
I’ve heard so many potential buyers hemming and hawing at the moment, hoping to time the market at it’s *absolute, exact bottom* that they have missed out on homes that were affordable and exactly what they were looking for. (Their words, not just mine.) So, I went poking around the interwebs to see what I could find about “crowd psychology.”
Robert Campbell, writing in his San Diego Real Estate Report, says “during upturns in real estate cycles, optimistic psychology takes a hold of the market…People start to believe that what is happening now will continue to happen, and thus they come to see less risk than actually exists in the market. ” Conversely, he says a downturn in the market brings on “the psychology of pessimism,” when “people are driven by risk avoidance, in order to minimize pain.” This makes total sense to me, from a practical perspective, as I watch buyers choose to wait, while house prices and mortgage rates match up perfectly with their long term goals. No one wants to feel like a sucker, so they continue to wait as if someone is going to fire up the alarm at some point, screaming, “We’re at bottom! Buy now!”
Enter the “Elliott Wave”
The idea that society moves in waves, that ‘mass psychology’ or ‘crowd psychology’ influences consumer decisionmaking is really nothing new. Interestingly, though, there is a whole cadre of financial advisors that use a principle based on investor psychology to predict how the market will move. In essence, the “Elliott Wave Theory” contests that market movements are driven by investor psychology: waves of greed versus fear, optimism or pessimism. An accountant, Ralph Nelson Elliott, wrote a series of papers in the 1930’s and 1940’s spelling out how this behavior creates waves, or price patterns, as buying and selling behavior swings from optimism at the peak to pessimism at the bottom.
Robert Prechter is probably the best known supporter of the theory in the investing world, founding Elliott Wave International. (He has a degree in psychology, so no wonder he was drawn to it!) Using the principle, he correctly forecasted the 1987 market crash and the beginning of the bull market in October 1982. However, he was off in the timing of the bear market by five years. So, I guess reading and correctly interpreting wave behavior isn’t the easiest task. However, most trading software packages include Elliott Wave analysis, and some traders use it to read the waves, to help them predict where the market is going.
Can You Hear Me Now?
People look to others to provide direction, whether they are investing in the stock market or in real estate. ‘Mass psychology’ and ‘crowd behavior’ can trump logic and data easily. The clients that base their decisions on diligent research and their future investment plans are the ones that reap the most reward. The question is, how do we get through to clients who can’t hear us for all of the noise everyone else is making?
