046: Please Mind the (Perception) Gap
This week we’re talking about something that many people acknowledge when it comes to investing, but not many take into full consideration. The element of risk.
Yes! And beyond risk, what is true risk vs. what is perceived risk. For example, did you know that more people die from vending machines than shark attacks every year?
And to think of the number of people who have vending machines in their offices or building!
The perceived risk is 🦈 sharks swimming in the ocean – Jaws theme playing in the background, but the real killer AKA the true risk holds…Hot Cheetos and Snickers. 😵😵
So bringing it back to a more serious topic. I guess with this new lens of perceived vs. true risk, and the state of the world today there’s a lot to consider when it comes to assets, apartment buildings, and other assessments.
It definitely does seem like the world keeps cycling through various traumatic events. Starting with the COVID-19 pandemic 🧫, the rise of inflation, the war in Ukraine, and now Travis Barker and Kourtney Kardashian’s overbearing PDA at every red carpet event.
At a time like this more than ever, it’s essential that we understand perceived vs. true risks. Especially since understanding the two may mean growing your financial security or reducing it.
But there’s another key element between perception vs. true risk and it’s called the perception gap.
Do elaborate here…
Remember going into those weird-looking hall of 🪞 mirror rooms when you were a kid? In it were different mirrors in different angles, like an optical illusion? Mirrors that made you look tall, stout, or super thin? You can view the perception gap as something similar!
It’s the reality of the perceived risk vs. the actual risk– perception changes everything right? How we view things and how we interact.
Plus, savvy investors recognize the gap and use it to gain huge profits. So they know that they may be looking into mirrors that definitely don’t look like them.
In the field of psychology, the perception gap can be defined as the subconscious application of psychological and instinctive filters that helps us quickly determine if the information or current situation is deemed dangerous.
Does anything come to mind about information being spread to the masses creating division and mass panic amongst people? Using facts and figures to formalize our critical judgment of how safe the information and/or event actually is can become too much for people.
But there’s also another thing to note when it comes to our brains and what we consider dangerous. ☠️
Neural connections. Our neural connections represent our first assessment of a situation and/or information that is used to protect us. Our brains are hard-wired to respond to risk with a mix of facts and feelings.
Bringing it back to “how does this relate to my passive income again?” Because, in the state of the 🌏 world today, with every news alert triggering our fight-or-flight AKA our neural connections, we have to assess how we can best protect our investments without panic.
Today, we’re getting in touch with our emotions and bringing you for the ride. We’ll take a deeper dive into three different types of emotional characteristics that may make some risks feel scarier than they actually are, facts not withstanding. 👇
Kicking things off, the first emotion we’re examining is uncertainty. If you’ve been with us long enough, then you know we often refer to ourselves as being in the CIA– Control Issues Anonymous.
We like to have a grip on things and keep a watchful eye. 👀 And in the face of so many economic and global events we investors especially try to grab onto anything that provides us with answers to our fears because the sense of knowing provides us with a reassurance of having, well, control.
Facing our fears with uncertainty can be solved by doing a little homework and taking on a defense investment strategy.
For example, studying long-standing and empirical data regarding the asset class, the submarket, projected growth, etc. Knowing these numbers, understanding how they work together and what this means for you and your assets today will help you address what could happen in the future.
Take for example what we know already about 🏢 multifamily apartments. We know they are the best risk-adjusted asset class due to their critical need in the market and what they mean for people. Everyone deserves, and needs safe, clean shelter.
So places to live? Check– that’s a foundational and fundamental need that’s not going anywhere.
Do you believe that there will be more demand for real estate in the future? Raise your hand virtually if you do. Do you believe that people will need clean, safe, affordable housing in the future? Last we checked, there’s no technology coming that’s going to eliminate the need for human beings to sleep. Do you believe that property will be worth more 20 years from now than it is today? Do you believe that?
When we look at the empirical data we see that multifamily apartments in the right markets had the least decline compared to the stock market, and a faster recovery immediately after any economic recessions throughout the history of the US.
And if you’re thinking “how have multifamily apartments held up in the past couple of years?” We got you. Recently we did a webinar addressing how multifamily apartments have held up in the past market downturn. Check it out in the show notes and the show description of this podcast.
Have you ever been around someone that just makes you feel a little… off? Like you can’t put your finger on it, you just know you’re not feeling their vibe. 🙄💭
Trust is a key emotional characteristic that may hinder an investor’s ability to recognize and work through any perception gap. There are so many things we can say when it comes to trust as it relates to investing, but we want to spend our focus on the trust between your team and the relationships you build while in this world of apartment investing.
Without trust, there isn’t business and we need both to work together to make sure that any leap of faith we take, we’re trusting the people who are leading us there. Remember what your parents used to say? “If everyone jumped off a cliff, would you follow them?”
In this case, your answer should be yes!
Apartment investing is no different. We place far more trust in any action if we feel strongly that our sponsorship team has our best interest in mind, gets us, and has a proven track record of doing what they say they’re going to do.
Consistency is key. We also understand trust is hard for people, especially in relationships and that’s okay as well. Building trust is like working a muscle, start small, and soon you’ll be gaining in no time.
And this goes back to our EP007 The Exact Strategy We Use When Vetting an Apartment Investment Deal. Our favorite question to ask when vetting someone is: Would we want to drink wine 🍷 and share a charcuterie board 🧀 with them?
If the answer is no, then no it is, for everything. If you can’t bond over brie then they’ve gouda go. 😂😂
Breaking bread 🍞 with others can tell you a lot about people and their motives. Just look at famous, historical, ancient leaders. If you don’t feel the connection then don’t wire over that $50k or $100K to the team. It’s as simple as that‼️
Risk vs. Benefit
The last emotion we want to get real about is anxiety. This is a deeper topic for the the Cashflow Multipliers Podcast what we can deliver today, but there are plenty of mental health and wellness books and blogs that go into this subject far better than we can. We’re talking about anxiety from an investor’s perspective.
Transition is a natural part of life and when we’re about to make a significant change to our lives whether it’s ending a relationship with someone, changing careers, or investments we inevitably generate a level of anxiety. And this is deeply rooted in the human psyche.
When we were first starting out in apartment investing, anxiety would hang out and make itself comfortable in our brains. We were like 👉 “How did you get here?! Who invited you?!”
At some point, we truly didn’t know what thoughts were real and what thoughts were exaggerated, and eventually, everything just lumped together to be one big ball of anxiety and it was not fun.
We want to be sensitive to the folks out there who deal with anxiety as a daily part of their lives and recognize that your pain and perspective on the situation are valid.
Anxiety can be powerful and keep us trapped in bad relationships, and lousy jobs, or prevent us from going after investments necessary to leave that lousy job.
Did you know that this mental illness was first described by Nobel Prize winner and Cognitive Psychologists Daniel Kahneman and Amos Tversky as the Loss Aversion theory?
Daniel Kahneman and Amos Tversky explained why we experience pleasure differently than the agony of a loss. Obviously other than being two very different emotions, losses are experienced in the amygdala part of the brain where the primary role is to process emotional responses such as fear and anxiety.
These responses are also known as fight or flight and they have been a natural part of humankind since basically the beginning of time. They helped us detect danger. You know, back when our ancestors were running around with lions.
This trait in our brain 🧠 is wild because it didn’t disappear with time. We may not be running around with lions anymore, but anxiety diverts us away from the intellectual part of our brains and moves more into our primitive bodies resulting in humankind acting more like our caveman ancestors. Thanks to them, as we navigate a “safer” world we still carry this instinct.
This brings us back to the perception gap and explains why some individuals may feel more reluctant to make an otherwise informed investment decision because they may perceive any potential loss as having a larger impact on potential gains.
The number of times we have seen this fear hold back investors is insane. For example, someone knowing that inflation is around 8% or higher, yet still thinks it’s safer to keep money under their mattress or in the bank– which is basically the same thing– and it’s losing 8% of its purchasing power per year.
Multiply that by 10 years, and the purchasing power of their money would have lost over 70% of its value. Yet many believe this is a “safer” choice. To just keep their money stuffed away and not working for them at all.
So, where do you go from here? 🤔🤔
If this sounds like you, or someone you know, there is hope in the situation, and starts with safety. In order to escape this loss aversion trap or be more mindful of the perception gap, seek out experts that can help create an environment that fosters your feeling of security.
Again, we are not experts or doctors 👩⚕️👨⚕️ when it comes to dealing with mental health, but we can offer perspective and share our own stories as investors who, not too long ago, were not mindful of the perception gap ourselves but overcame it through fostering a safe space for ourselves and with an incredible team.
In this safe space, you will be free to access your full intellectual capacity so that you can become clearer about your purpose and goals. In this environment, you will be able to take strongly committed actions that will change the course of your life, discover financial freedom, and create safety for not just you, but your family and loved ones.
If you’re wondering where you can start with such an incredible, safe, and squishy community–in a good way! We invite you to check out the Kitti Freedom Club 〰️ a passive investors club made for everyday people just like you. You can learn more through this link.
Our hope is that you’re starting to put together the pieces of what your perceived risks are vs. true risks. What are the vending machines 🍬🍫 in your life, and what are sharks?
Taking the time to seek understanding of our fears (with the help of the community and professionals!) can be the difference between staying where you are, or retiring early and living your dream life. 🍬🍫
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