Influence of Behavioural Biases on Real Estate Investment Decisions by Agents in Shenzhen, China

Abstract

Behavioural biases naturally affect real estate investment decision. It may be very detrimental to an investor's fortune to let one's behavioral biases impact their decision-making process. Because of the inherent prejudices that are programmed into our minds and bodies, human people are prone to making judgments that are not in their best interests (Gordon, 2011). An investor is presumed to be normal in behavioural finance. The objective of this study was to determine the influence of behavioural biases on real estate investment decisions by agents in Shenzhen, China. A sample of 42 real estate agents operating in Shenzhen China was selected. Semi-structured questionnaires were administered. Five distinct biases were analyzed. Overconfidence, Frame Dependence, Herding Effect and Mental Accounting. In order to determine how much agents in Shenzhen's real estate market are influenced by their own behavioral biases while making financial investments, a regression study was conducted (China). By examining the beta values, we can see that the herding bias and overconfidence bias both negatively impacted the choice to invest in real estate, while the frame reliance bias and mental accounting prejudice both positively impacted the choice. The effect of herding bias (t-value = -2.452, p-value= 0.014), overconfidence bias (t-value = -3.889, p-value= 0.000), frame dependence bias (t-value = 3.437, p-value= 0.001) and mental accounting bias (t-value = 4.239, p-value= 0.000) were found out to be statistically significant as confirmed by the high t-values and p-values of less than 0.05. The research found a significant correlation (R-value = 0.729) between the four common cognitive biases (herding, overconfidence, representativeness, and mental accounting) and the real estate investment choices made by Shenzhen real estate agents. Adjusted R Square score of 0.525 indicates that irrational beliefs and biases account for 52.5% of the total variation in Shenzhen real estate agents' investing choices. Additionally, the research found that representative bias and mental accounting bias had a negative and statistically significant influence on individual investment decision making, but herding bias and overconfidence bias had no effect. It followed that an increase in herding bias and overconfidence bias would lead to worse individual investment decisions, whereas an increase in representative bias and mental accounting bias would lead to much better decisions. The research found that representativeness bias is one of the most prevalent biases influencing investing decision-making due to the fact that individuals tend to make choices based on preconceived notions or past and anticipated securities price movements. According to the findings, real estate professionals should be aware of and prepared to deal with cognitive biases, and they should also use effective allocation procedures to calculate the relative risk and reward of potential investments.