Good judgement is one of the most important attributes of a successful property investor. Timely, well-informed decisions are often the difference between profit and loss.
Discussing ideas and coming to a conclusion as a group is often felt to be one of the best ways to ensure that decisions are well considered. Certainly, working as a team and harnessing the fact that individuals see things from different perspectives is a useful exercise — however, in some cases, making decisions as a group can actually result in poor choices.
‘Groupthink’ is a phenomenon whereby the dynamics of a team unduly affect the outcome of the decision making process. This concept can be one of the main contributors towards making ill-informed decisions. When members of a group are too focused on harmony and minimising conflict, they may censor any objections or reservations, resulting in a loss of independent thinking, failure to give adequate consideration to the negatives and an inflated sense of confidence that the decision taken is the right one.
In a cyclical market such as the property industry, groupthink is a seriously dangerous, yet surprisingly common, phenomenon. The sheer volume of those developing or investing in London luxury apartments is an example that highlights this. Traditionally, this asset class has done very well as investors from places such as South East Asia have looked to export capital to international cities that they consider safe havens. London has been a popular choice given the relatively low cost of property ownership in the UK. But have investors seriously considered what would happen to this market if fiscal policy were to change, South East Asian economies were to falter, or if there were to be a serious shock to the economy as the result of international conflict or terrorist activity, for example?
Part of the decision-making process should be calculating the likelihood of risk and the ability to absorb some of the downside if things do not go well. Where developers are overpaying for sites and therefore relying on average prices per sq ft continuing to rise, common sense would say that something has gone wrong in the decision-making process.
It is too easy to jump on the bandwagon of the London high-end residential market, rather than considering whether the real fundamentals remain as attractive as previous success stories.
So how can businesses avoid groupthink? In many cases, an attitude shift is required. Business leaders need to be strong-willed, entrepreneurial individuals who have confidence in their own ideas and are able to persuade others; but they also need to be able to listen, actively encouraging the teams they work with to challenge apparently widely-held beliefs and raise doubts and concerns.
This is all the more important when making investments that are opportunistic and higher up the risk-reward curve. At Patron, our efforts to eliminate groupthink have been a key factor in the consistently high returns we have achieved for our investors. As well as encouraging questioning, we focused on employing and partnering with high-level executives who have the confidence to go against the grain and raise doubts that more junior colleagues might not have wanted to voice.
Designating clear roles and responsibilities within groups is a further important method of preventing groupthink. In the aftermath of every major decision that in hindsight seems seriously flawed, those involved tend to have assumed that someone else was calculating the risks involved and addressing the practical issues of implementation. Using the poll tax of 1990 as an example, these elements were not given enough thought, leading to the social unrest that ensued.
This is a lesson that applies both to our industry and within a political context. As the idea of mansion tax continues to stimulate debate, have the practicalities of implementation and impact on communities been considered properly, or has groupthink occurred here too?
Keith Breslauer is managing director of Patron Capital