1. 21 st Annual Conference of the European Real Estate Society Heuristic-driven bias in property investment decision-making in South Africa by Dr GA Lowies-Prof JH Hall-Prof CE Cloete

2. This paper is kindly sponsored by the IRE/BS Foundation for African Real Estate Research

3. TABLE OF CONTENTS Introduction Literature & previous research Research method Empirical analysis and results Conclusion Recommendation Contact details

4. INTRODUCTION Behavioural finance Behavioural research on the property market & research problem (Hardin:1999 & Kishore:2006) Aim/Objective of this research  To determine the influence, or not, of anchoring and adjustment and subsequent herding behaviour on property investment decisions  Focus: Property fund managers of listed property funds Difference of this research  Sample  Emerging market

5. LITERATURE & PREVIOUS RESEARCH Introduction International studies  Tversky & Kahneman (1974); Edwards (1982); Welch (2000); Shefrin (2002); Cen, Hilary & Wei (2010); Kudrayavtsev & Cohen (2010); Jegadeesh & Kim (2010); Lin (2011)  Findings:1. Tendency to stand with anchor value 2. Lack of understanding of new information 3. Herding behaviour exists  Northcraft & Neale (1987); Gallimore, Hansz & Gray (2000); Leung & Tsang (2011) – similar findings as above  No South African studies to date

6. RESEARCH METHOD Sample characteristics:  Fund managers of listed property funds; South African based; actively traded; 27 funds (29 fund managers) Research design & instrument:  Survey-based design using a questionnaire Questionnaire:  Decision-maker profile; fund information; anchoring and adjustment; herding behaviour Statistical analysis:  Basic descriptive analysis; Fisher’s exact test Response rate = 59% (80% market cap representation)

7. EMPIRICAL ANALYSIS & RESULTS (1) Anchoring and Adjustment Property choice (anchoring):  Majority of respondents (76.4%) choose property C ) PropertyFrequencyPercentage Property A – Average return; low risk 423.5 Property B – Average return; high risk 00 Property C – Above average return; moderate risk 1376.4

8. EMPIRICAL ANALYSIS & RESULTS (2) Property choice after the introduction of new information (adjustment):  Property A the more favourable choice given the new information  85% of respondents that had previously chosen property C, stays with property C. Property choiceFrequencyPercentage Yes, Property A: 70% probability higher return than property C; 30% probability lower return than Property C – following financial year; same risk profile. 423.5 Yes, Property B: 50% probability lower return than its current return; 50% probability higher return than its current return – following financial year; same risk profile. 15.8 Yes, Property C: 70% probability same return than its current return; 30% probability lower return than its current return – following financial year; same risk profile. 15.8 No, my decision stays the same 1164.7

9. EMPIRICAL ANALYSIS & RESULTS (3) Change to the investment decision of the competitors knowing that the competitors invest for the wrong reasons  No irrational herding Decision madeFrequencyPercentage Yes, I would change my decision to that of my competitors. 00 No, I would continue with my original investment. 17100 Not sure 00

10. EMPIRICAL ANALYSIS & RESULTS (4) Change to better informed competitors’ investment decision in relation to the change in the initial investment decision  No statistical significance although 52.9% of respondents would not change their initial investment decision even if their competitors is better informed  No rational herding Change to the better informed competitors’ investment decision Change in the initial investment decision NoYes Total % Yes 43 41.1 No 63 52.9 Not sure 10 5.8 Total N = 17 116 100 Fisher’s exact test: p=0.999

11. EMPIRICAL ANALYSIS & RESULTS (5) Change to competitors’ investment decision because of a degree of uncertainty in relation to the change in the investment decision due to new information  No statistical significance (p>0.05)  Slightly higher than previous result – no rational herding Change to competitors’ investment decision because of a degree of uncertainty Change in investment decision due to new information NoYes Total % Yes 02 11.7 No 83 64.7 Not sure 31 23.5 Total N = 17 116 100 Fisher’s exact test: p=0.24

12. CONCLUSION Aim: to establish the influence of anchoring and adjustment and herding behaviour on property investment decisions. Anchoring and adjustment:  Consistency with results of Northcraft & Neale (1987); Kudryavstev & Cohen (2010) and Leung & Tsang (2011).  Disregard the fact that new information deemed the original anchor less favourable.  Bias may exist due to extreme conservative outlook Herding behaviour:  In contradiction to Northcraft & Neale (1987) and Lin (2011)  No statistical significant results

13. RECOMMENDATION Restructuring of normative framework to incorporate behavioural factors. More in-depth empirical investigation on a larger sample – comparative study. Investigating the decision-making environment to understand the socio- political barriers. Government influences on investment decision-making.

14. CONTACT DETAILS Dr GA Lowies Department of Financial Management University of Pretoria, South Africa 0002 +27(0)12 420 3404 +27(0)76 858 2671 braam.lowies@up.ac.za