Question

Scenario # 4 Randy and Sharon have just had a lot of recent success buying and flipping houses. That is, they find houses that are somewhat cheap to buy, fix them up, and sell them at higher prices. Their recent glory has also been spurred on by the fact the their town in Colorado has been in the midst of a real estate boom. Due to their current success, Randy and Sharon have no reason to believe that their strategy will not continue into the future. So, they take out a second mortgage on their primary home, and continue to buy distressed properties in hopes of fixing them up for future profits. They feel that their current streak will be representative of future results. 1) What behavior/bias is present? 2) Why is this behavior detrimental? 3) What could have been done differently, or what could be done differently next time to avoid this result?

Answer 1

This behaviour depicts overconfidence and over optimism.

It may be detrimental because the real estate boom may not continue in the future. This will bring a decline in the prices and burden them with the mortgages. They may default on the mortgages and can even go bankrupt.

They should be more watchful of future trends. They must check the trends and future predictions before taking a second mortgage. The market analysis reports must be carefully considered before taking on more debt.