Psychologist Daniel Kahneman’s work on human decision making systems has proven valuable when it comes to real estate investing. Kahneman challenged the notion that rationality prevailed in modern economic theory. He instead proposed that our biases have a large, oftentimes unseen impact on the economic decisions we make.
In this video, Origin Investments Principal David Scherer outlines the process by which Origin counteracts this inherent tendency towards following our biases, through use of the Objective Risk Model. Origin’s Objective Risk Model takes a wide range of inputs and determines the correct return for the risk taken. It has proven to be extremely accurate in predicting the outcome of a deal. Of course, this model is only one input in the deal selection process, but the fact that it is completely unbiased by human opinion makes it an extremely valuable asset when evaluating thousands of deals.
Before Origin implemented its objective risk model, we fell victim to two commonly held beliefs about private real estate investing. First, we believed off market deals held inherent advantages against marketed deals. We also believed joint ventures typically led to favorable returns. Both of these assumptions turned out to be false, and both were identified by our objective risk model.
Where else might our biases have prevented us from seeing clearly?