In the latest Bayfield Training Webinar, Sonia Martin-Gutierrez, in collaboration with Dr Markus Schuller (Panthera Solutions), present: Applying behavioural finance to real estate investing.  The global pandemic has strained the behavioural and choice architecture systems that investment managers use for their decisions. How can real estate investors practically benefit from behavioural considerations? In this interactive webinar, Dr Markus Schuller, founder and managing partner of Panthera Solutions, explained practical tips on how to create the best conditions to improve decision-making as a real estate investor.

Investment Decision Support System

To begin, Dr Schuller explains that his discussion is centred around what is commonly referred to in academia as the third generation of optimisation techniques. Third generation optimisation techniques rest upon several general assumptions. Firstly, the idea that markets are no longer efficient but adaptative. Secondly, market participants are no longer seen to be rational but bounded in their rationality. Thirdly, it is an approach to understanding capital markets that they should no longer be driven by correlation-based analysis, but rather causality-based to most accurately comprehend its complexity.

Dr Schuller provides a schema that broadly separates investment decision making into two elements: Choice architecture (consisting of investment process and toolbox) and behavioural considerations (on an individual and group level). As Dr Schuller explains, choice architecture is a relatively well-covered aspect of investment-decision making. The interplay of individual behaviour, group behaviour, toolbox and investment process aggregates to the investment decision support systems that determines investment-decision making. A simple example would be the process which guides decision making such as a stated investment philosophy or strategy.

However, as Dr Schuller emphasises, behavioural considerations remain a relatively underdeveloped aspect of decision-making within finance. Nonetheless, there has been a surge in scholarship attempting to fill that gap. Specifically, behavioural finance studies the influence of psychology on the behaviour of investors or financial analysts. It also includes the subsequent effects on the markets. It focuses on the fact that investors are not always rational, have limits to their self-control, and are influenced by their own biases.

Dr. Schuller considers behavioural aspects at the individual and group level. First, cognitive diversity in investment teams is essential to complementarily assess capital markets’ complexities. Second, individual empowerment is essential to keep the knowledge base up-to-date and applicable.   

Causal Assessment of Evidence 

Next, Dr Schuller provided a more practical example of the application of behavioural finance. For instance, concerning real estate, investors try to maximise their asymmetry between reward and risk drivers—i.e. minimise risk and maximise reward. Third generation optimisation promotes most evidence-based investment decisions as a solution to improve the asymmetry between reward and risk more accurately. As Dr. Schuller articulates, “evidence-based investing from a cognitive perspective means that one remains exposed to the optimal cognitive load.” The inverted ‘U’ Curve depicts the optimal cognitive load showing that optimal performance occurs at an intermediate level of arousal, while low and high levels of arousal will result in impaired performance. Consequently, by staying in the optimal zone, an investor can source and process relevant evidence faster than others while building a more stable learning foundation. Ultimately, this provides an investor with a better understanding of capital market risks related to transactions.

Real Estate Insights

Next, Dr. Schuller assessed the state of the real estate asset class through several themes, highlighting the most prominent trends. Firstly, current research indicates that real estate is relatively well-developed regarding SDG and providing a rewarding impact. Secondly, insights on team and strategy execution indicate that real estate remains somewhat paternalistic and hierarchical. Thirdly, choice architecture rules in real estate investing are beginning to reassess the structural process of how decisions are made. For example, relative to traditional listed equity securities, investment decisions are tested and made less often within real estate investing. Thus, research indicates that real estate teams are beginning to integrate behavioural considerations by improving the process of decision-making.


The importance of refining the ‘process’ of decision-making is summarised in Dr. Schuller’s concluding remarks. Specifically, establishing most evidence-based decision-making, rather than purely focusing on the outcome, can help maximize the risk-return asymmetry.