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Investment Psychology: The 3 Best Ways to Approach Wealth Creation

Investment Psychology: The 3 Best Ways to Approach Wealth Creation

3 min read
Larry Alton

Larry is an independent, full-time writer and consultant. His writing covers a broad range of topics including busine...

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If you study the most successful real estate investors of the day, you might be struck by how wealthy they are. However, you should consider how they got to where they are. Because in most cases, they weren’t born into wealth. Their success is the direct result of smart decision-making and the proper mindset. And not all of these decisions and mental frameworks have to do with financing, leverage, and money.

If real estate investing were all about dollars and cents, success could be synthesized down to a simple formula. But alas, it’s much more than a mathematical equation.

In order to be successful in investing in income-producing properties, you must account for the softer, less tangible side of things. I’m talking about the emotional and psychological components that fuel results.

How Does Psychology Play a Role in Real Estate Investing?

When a young and inexperienced real estate investor fails, their lack of results is often preceded by a shallow mental framework and wavering psychology. They become scared at the first sign of failure, trust in their gut at the expense of running numbers, and can’t stomach the ups and downs of the market. All of these factors meld together to create a sense of instability, and ultimately the whole thing comes toppling down.

If you want to be successful, you must begin by flipping the script. Yes, the financial side of things is important, but that’s doable. (There are ample ways to invest, even if you don’t have any cash.) The tricky part is embracing the mental and emotional side of things.

Here are some practical yet important psychology tips and tricks that successful real estate investors use (and you can, too) to become successful.

Related: The Psychology of Making Offers

1. Learn to Accept Losses

Are you familiar with the term “loss aversion?”

In the simplest terms, it’s a behavioral finance concept used to describe a person’s tendency to prefer avoiding losses more than acquiring gains. In other words, losing something you already have hurts more than the positive feelings of gaining something you don’t have.

Psychologist Daniel Kahneman spent many years studying this, running multiple studies, and found that this concept applies to both small and significant sums of money. In one of his experiments, people were more upset about losing $10 than they were happy about finding a $10 bill. He concluded that losses hurt roughly twice as much as gains make us feel good.

Losses are never good, but you can’t let them rule your real estate investing decisions. If you’re constantly worried about the possibility of losing—or if you let a past investment loss cloud your future decisionmaking—you’re never going to be successful.

Quelling a heightened sense of loss aversion and using smart, objective metrics to take calculated risk is the approach successful investors take.

Ben Franklin with sports a shiner (black eye) and a band-aid on the face of a US One Hundred Dollar Bill (C-Note) as an illustration of the weak dollar.

2. Avoid the Gambler’s Fallacy

The gambler’s fallacy is another interesting concept. It’s the belief that if an event has already happened, it’s less likely to happen again after the event has already occurred (or vice-versa).

In other words, if you flip a coin five times and it lands on heads each time, the gambler’s fallacy says that the sixth flip is more likely to be tails. But in reality, the sixth flip doesn’t care about the first five. There’s still a 50-50 chance that it lands on heads. The coin has no memory.

In real estate investing, it’s easy to assume that because you failed on a previous investment, the odds are bound to be in your favor this time (or vice-versa). But by taking this approach, you could end up throwing good money at a bad deal.

The best way to avoid the gambler’s fallacy is to know what your goals are and use a sound set of principles to guide your decision-making. Keep a long-term mindset and trust that your commitment will be rewarded.

Related: The Single Best Strategy for New Investors

3. Never Follow the Crowd

It’s easy to get so caught up in following what other investors are doing that you start trying to replicate everything they do. And while there’s something to be said for using proven principles, be wary of making assumptions based on someone else’s success in a different market.

You have to analyze your own strengths and come face-to-face with your personal weaknesses. If you follow the crowd, you’ll make decisions that are smart for someone else but unwise for you. After all, if we all made the same decisions, we’d all be sharing the same marketplace.

Charting a different path business concept as an independent free thinker idea with air show jet airplanes in an organized formation with one individual plane setting a new course with 3D illustration elements.

Adding It All Up

Real estate isn’t some formulaic endeavor that’s predicated on having X dollars in order to get Y return. Unfortunately, it’s not as simple as feeding dollars into a machine and waiting for a bigger return.

There are so many mental and emotional wheels turning behind the scenes. And if you want to be successful as an investor, you must learn how to shape your psychology so that it’s conducive to sound decisionmaking, steadiness, and a long-term commitment to growth. If you do those things, results will eventually follow.

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What mentality do you use to successfully approach investing?

Tell us some of your tricks in the comments.