The idea of cognitive biases was first introduced by Amos Tversky and Daniel Kahneman in the 1970s. They introduced the idea that humans often fail to make rational decisions when assessing risk because we are wired to take shortcuts in order to act quickly. There are a few of these biases that can be applied to the business of being a landlord.

Landlords go through a rigorous due diligence process before choosing the right tenant in order to limit the risk of selecting a tenant who will break the lease. They review credit reports, call previous landlords, current employers, and finally interview the applicant. This large intake of information can be overwhelming for a landlord as most landlords screen tenants infrequently. This is also the point where many landlords unsuspectingly allow cognitive biases to cloud their judgment, which puts their rental investment at risk.

Landlords should be aware of three key cognitive biases that may come their way when trying to choose the right tenants: stereotyping, confirmation bias, and hyperbolic discounting.

Stereotyping

Stereotyping, a social cognitive bias, assumes a person is a certain way because they are a member of a certain group. Societal stereotypes make it easier to organize people; however, they often are seen as hurtful biases, normally hinging on ethnic, religious, or sexual stereotypes.

If a prospective tenant is wearing a Rolex to the initial tour of the property, the landlord could take this is as a sign of their financial status and perceive them to be someone that has sufficient disposable income to cover the rent. In reality, the tenant could have just as easily borrowed the watch, financed it or stolen it to create the illusion that they are financially stable. The landlord here is using a stereotype based on their appearance to assess their financial status.

Confirmation Bias  

Confirmation bias is when someone focuses on information that only confirms existing preconceptions. Humans tend to overestimate their ability to predict an outcome when given a data set and often seek out more information to validate their bias.

Landlords invest time and money in their due diligence process to collect as much information as they can on their applicant; however, the collected information is often incomplete, so landlords end up making decisions based on 80% of the information and assuming this information is valid. The illusion of validity comes into play when the landlord believes they can predict the outcome of the information at hand, thus thinking they can make a real, informed decision about the success of the applicant’s tenancy and ability to stay in their rental unit long-term and without any property damage.

Hyperbolic Discounting

Hyperbolic Discounting, a financial bias, is when people prefer a smaller, sooner payoff rather than larger, later reward. The goal of any property manager is to limit vacancy and maximize cash flow. However, this is not always easily achievable due to market conditions.

Landlords may sometimes choose the subpar applicant in a market where there is a low supply of tenants just to fill the unit for that instant cash flow, instead of looking for a tenant that has less risk of defaulting. Many individual landlords run on lean margins where a loss amounting to a few months of rent could cause the landlord to default on their mortgage.

To many, real estate is a strategic investment and lucrative asset that poses many long-term gains. This does not detract the fact that real estate can also represent a home. The emotional element of having the power in decision who gets a home can often be frightening for some, which can hinder their rational decision making.

So, the next time you meet a potential tenant, ensure that the assumptions, judgments and decisions you are making about them are based on fact, and not just a “good feeling” that you have about them.  

Sources Cited:

Raconteur – Cognitive Bias

 

The first step in eliminating bias in your decision making process is by utilizing the Naborly Report which gives the landlord a holistic view of an applicant. Learn more about how you can get a Naborly Report on your prospective renters for free with Naborly.