No One Ever Made A Decision Because Of A Number – They Need A Story

Our intuition is always looking for patterns and embedded in these patterns are clues to unlock an underlying order.  Patterns can enable us to quickly analyse a situation and ask the right questions, shaping our response to achieve our objectives. 

The real estate market is non-homogeneous, opaque and infrequently traded, which means that the data observed is less reliable or consistent compared to other markets. Finding patterns requires a little more work. Further, we become emotionally attached to the buildings for their architecture or the coffee shop downstairs for their stories and may gloss over the weaknesses that may lead to poorer returns.

People develop biases about certain buildings because of their past dealings, their experiences in the industry or the building’s reputation (be it good or bad). Humans are prone to judgemental bias because our brains make decisions based on only a few data points. Because of this, if we’re not careful, instead of assessing deals on their merits, we tend to justify deals with only a few points of data and then find more to support our bias.

But when we are tasked with investing money that isn’t ours, we cannot let our behavioural biases dictate our decision making. Since behavioural ideas can’t be put into economic models or spreadsheets, how do we account for human emotion and avoid being fooled by human irrationality?

The risk management software developed in-house by EG, PRISMS®, has been tackling this issue since inception. PRISMS® helps us remove many behavioural biases when assessing acquisitions to quantitatively score risk in real estate deals.

For one, PRISMS® forces discipline by systematically auditing almost 30 key assumptions in financial models and over 50 contextual market data sets to inform those assumptions. This prevents the deal team from justifying deals based on only a handful of facts or chasing deals by optimistically dialling up key assumptions because of their positive views about the asset.

As Fund Managers, we need to apply a consistent method to write each asset’s story as a number in order to measure risk and compare real estate deals across markets and sectors that seemingly aren’t comparable. Numbers, not intuition, outperform the markets. PRISMS® keeps EG focused thereby building a better path to better returns.