Heuristic-driven bias in property investment decision-making in South Africa
| Date | 01 February 2016 |
| Published date | 01 February 2016 |
| DOI | https://doi.org/10.1108/JPIF-08-2014-0055 |
| Pages | 51-67 |
| Author | Gert Abraham Lowies,John Henry Hall,Christiaan Ernst Cloete |
| Subject Matter | Property management & built environment,Real estate & property,Property valuation & finance |
Heuristic-driven bias in property
investment decision-making in
South Africa
Gert Abraham Lowies and John Henry Hall
Department of Financial Management,
University of Pretoria, Pretoria, South Africa, and
Christiaan Ernst Cloete
Department of Construction Economics,
University of Pretoria, Pretoria, South Africa
Abstract
Purpose –The purpose of this paper is to determine whether anchoring and adjustment as
heuristic-driven bias and herding behaviour influences listed property fund managers in South
Africa’s property investment decisions. The study contributes to the understanding of the influence
of heuristic-driven bias and herding behaviour on property investment decisions made in a highly
volatile environment.
Design/methodology/approach –This study is focused on the subject field of behavioural finance
and follows a survey-based design. A questionnaire was finalised after completion of the pilot study
and was sent via e-mail to fund managers of all South African-based property funds listed on the
Johannesburg Securities Exchange. Non-parametric statistical measures were used.
Findings –Consistency with other studies suggests that anchoring and adjustment may exist in the
decisions made by listed property fund managers. However, fund managers tend to not adjust to new
information due to the current socio-political environment in South Africa rather than a lack of
understanding of the new information.
Practical implications –It is recommended that investors form developed and emerging economies
take notice of the highly volatile circumstances in which property fund managers in an emerging
economy such as South Africa have to make investment decisions. The probability of missed gains as a
result of conservative investment strategies may have an impact on future returns.
Originality/value –This study enhanced the understanding of the role that heuristic-driven bias
plays in the South African property industry and more importantly, it went some way towards
enhancing understanding of behavioural aspects and their influence on property investment decision
making in an emerging market.
Keywords Behavioural finance, Emerging markets, Herding behaviour,
Anchoring and adjustment, Heuristic-driven bias, Property fund managers
Paper type Research paper
1. Introduction
Property is a valuable asset which is often regarded as symbolic of stability and
independence. Decisions regarding property and, in particular, property investments,
have an effect on the productivity, wealth and growth of a society. The influence of
human behaviour on decision making is still a relatively new concept in property
investment. Roulac and Distad (2004) suggest that most of the literature available on
property from an educational paradigm focuses on law and brokerage, and they
conclude that it is likely that the probability of wrong calculations and decisions that
rely on textbook material may well lead to market inefficiency.
Kishore (2006) predicted that behavioural research on the property market was
imminent, given the increasing amount of research on human behaviour in the stock
Journal of Property Investment &
Finance
Vol. 34 No. 1, 2016
pp. 51-67
©Emerald Group Publis hing Limited
1463-578X
DOI 10.1108/JPIF-08-2014-0055
Received 28 August 2014
Revised 12 May 2015
Accepted 17 May 2015
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1463-578X.htm
51
Investment
decision-
making in
South Africa
market, which is a more predictive market. The property market, according to him , is
sectioned, has a high frequency of unavailable, quality data, and is more inefficient and
less informed than the stock market. The property market also has a high level of
human interaction, and thus warrants research about the influence of human behaviour
on property market decision making.
In reflecting on possible directions for research on the property market, Newell
(2007) suggested the following new research areas that have emerged over recent years:
•sustainability in property markets;
•emerging property market dynamics;
•investment strategy and property investment decision making; and
•less focus on number-crunching econometrics with a stronger focus on simple,
high-impact papers.
In an attempt to improve the knowledge base of property investment decision making, the
aim of the present study is to determine whether or not anchoring and adjustment, as
heuristic-driven bias, and herding behaviour influence property fund managers’buying
and selling decisions. More specifically, the study seeks to answer the following questions:
•Do property fund managers anchor their investment decisions?
•Do property fund managers adjust their initial investment decisions as new
information is introduced?
•Is any form of herding behaviour present in the decision-making framework of
property fund managers?
The study aims to contribute to the existingliterature of heuristic-drivenbias in property
investment decision making. Moreover the study expands the knowledge on the
decision-making process of listed property fund managers in an emerging
economy context.
To achieve the aim of this study, the authors first review the literature on heuristic-
driven biasas behavioural finance concept,especially towards anchoringand adjustment
and herding behaviour. The following section gives a comprehensive overview of the
South Africa property market. Thereafter the literature on property investment decision
making and its relation to heuristic-driven bias is reviewed. The literature review forms
the basis for the empirical testing of the existence of anchoring and adjustment and the
herding heuristic-driven bias. The empirical section of the study includes an explanation
of the research method, the analysis of the results, conclusion and recommendations.
2. A background on the South African property fund market
South Africa is an emerging economy with a turbulent political history and a diverse
population. Table I gives a general socio-economic profile of South Africa as at the end
of 2013.
According to Statistics South Africa, at the end of December 2013 the South African
population was at 52 million people of which 24 per cent was unemployed. Of the total
number of households in South Africa 55 per cent in 2013 (53 per cent in 2002) owned their
own property while 14 per cent used informal dwellings and another 14 per cent made use
of other forms of tenure. Furthermore 82 per cent of these households had access to
electricity while 71 per cent had access to water. At the end of 2013, 24 per cent of all
South African households had no or little access to food (Statistics South Africa, 2013).
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JPIF
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