Circle of Competence
Circle of Competence
I write about money and real estate often because many people don’t see the connection. The potential for money to be lost is increased when a real estate purchase is made without information – and I’m not talking about the “isn’t this a lovely kitchen” kind of information.
Warren Buffet, the famed investor, often discusses the concept of a “circle of competence.” In his field the circle consists of all businesses with which the investor is familiar and understands. His words came to mind recently when I read that the author Jacquelyn Mitchard lost her life savings – she invested with two “investment specialists” who did currency arbitrage.
Another example, closer to my world, is an acquaintance (who didn’t use Homebuyer Associates) who had an offer to purchase fall apart the day before closing. The buyer commented, “It was a foreclosure and I don’t know much about foreclosures.” Buffet also advises to “Invest in what you know.” If the buyer didn’t know much about foreclosures, why was he trying to buy one?
I’m reminded of a lyric by Loudan Wainwright III, “You suppose something will happen when someone gets paid.” It is implied that the happening will be good. Ms. Mitchard and our real estate acquaintance found otherwise. By the way it’s a great song about his mother so if must choose between reading the newsletter or the song, listen to the song.
http://www.youtube.com/watch?v=2FlWsGgzfww
I’ve learned to accept the fact that everyone knows real estate. I’m of the opinion that if someone believes they know more than they do, an experienced agent can use that information against you. Illusory superiority is a cognitive bias that causes people to overestimate their positive qualities and abilities and to underestimate their negative qualities, relative to others. If you suffer from illusory superiority, and if you’re not careful, it can cost you money.
(In a survey of faculty at the University of Nebraska, 68% rated themselves in the top 25% for teaching ability; 87% of MBA students at Stanford University rated their academic performance as above the median.)
Two professors from the Department of Psychology at Cornell defined this phenomenon this way: The more incompetent someone is in a particular area, the less qualified that person is to assess anyone’s skill in that space, including their own. As a result, the incompetent will tend to grossly overestimate their skills and abilities.
I don’t know how or why everyone knows real estate but they do. Recognizing the possibility that illusory superiority may play a role, I believe our objective, unemotional approach – as Exclusive Buyer Agents – has helped our clients avoid mistakes when buying a home.
It helps that I know what I don’t know. When I venture into “I don’t know land” I consult or hire or use people who do. This approach started on the playgrounds. At age 14-15 years old I’d find playgrounds around the city to play basketball where I was the 9th or 10th best player. I thought I’d learn more by playing against players who were better than me. This approach allowed me to attain a goal I’d had since 7th grade – playing college basketball.
Ten years after college I was able to start Homebuyer Associates because I talked to people smarter than me about business concepts (none worked in real estate). One remains my financial planner today and the other is a former boss now retired. This approach helped me to become my own boss. Business was an adult playground but I again found business players better than me to help me reach my goal.
I refer to this approach as the “bump theory” as in when you bump into someone who knows more than you about a subject. Ask questions and don’t pretend to have all the answers. Of course you must also recognize when you bump into people who suffer from illusory superiority. They can show you how not to do things which, in a way, is educational.
I remain mystified more people don’t use this approach. Those who invest in arbitrage schemes or “don’t know much” about what they are doing would be wise to give the “bump theory a try.”
Speaking of information gathering, if you bought or sold a home and bought or plan to buy before the tax credit deadline you may find the link below of interest. It will help you navigate how to get your tax credit, specifically section 5405.
This month’s commentary is collaboration with Seamus Holloway, my nephew. Thanks for reading. Feel free to contact us if you have any real estate questions.
Thanks for reading,
Michael D. Holloway
Homebuyer Associates
414.254.4129
www.homebuyerassociates.com
homebuyeba@gmail.com
Michael D. Holloway/Seamus Holloway