Auction results from the Australian TV series “The Block” were broadcast across the country earlier this week.
For those not familiar with the show, it follows a group of contestants who compete over twelve weeks to renovate apartments and/or houses in a particular street or building. At the end of the twelve weeks, these residential dwellings are put up for auction, with the contestants able to keep any of the profit above the reserve price. The contestants with the largest profit on auction day also win additional prize money.
The results from this year’s auctions varied dramatically.
|
Season 18 Profit |
|
| House 1 | $20,000 |
| House 2 | $169,000 |
| House 3 | $0 |
| House 4 | $0 |
| House 5 | $1,586,666 (+ $100,000 Prize Money) |
Following the auctions, almost every contestant (bar the winners from House 5) seemed shocked and distraught with the results. As a casual “Block” viewer, the contestants’ level of disappointment caught me off-guard. Some had seemingly made a decent profit ($169,000 & $20,000 are not sums to scoff at), so why did even these contestants seem upset?
I suspect the answer lies with a cognitive bias that many individuals can also face when it comes to investing. The “Gambler’s Fallacy” bias occurs when an individual erroneously believes that a certain random event is less likely or more likely to happen based on the outcome of a previous event or series of events.
When you examine previous results from “The Block,” you can start to understand why the contestants may have felt so hard done by and where the expectations about the profits they should have been making were stemming from.
|
Season 17 Profit |
Season 16 Profit |
|
| House 1 | $296,000 | $650,000 |
| House 2 | $644,444 (+ $100,000 Prize Money) | $650,002 |
| House 3 | $400,000 | $460,000 |
| House 4 | $530,000 | $506,000 |
| House 5 | $301,524 | $966,000 (+ $100,000 Prize Money) |
Every piece of financial literature in Australia with an investment return figure included contains the same disclaimer:
“Past performance is no guarantee of future results.”
However, despite that statement being plastered everywhere, we often see individuals consistently dismiss the warning and focus on past returns expecting similar results in the future. A good financial adviser can work with investors to determine whether a winning pattern is gold or pyrite.
Contestants on “The Block” and everyday investors can both fall victim to cognitive biases. For investors, working with a professional financial adviser who can help identify these biases and act as an impartial fiduciary can help increase your chances of investment success.
James Alexander [GradDipFP, MFinP, BBus (Fin, Mgt)] is an Employee of Alman Partners Pty Ltd, Australian Financial Services Licence No: 222107.
Any information provided to you was purely factual in nature. It has not been taken into account your personal objectives, situation or needs. The information is objectively ascertainable and is not intended to imply any recommendation or opinion about a financial product. This does not constitute financial product advice under the Corporations Act 2001 (Cth). It is recommended that you obtain financial product advice before making any decision on a financial product such as a decision to purchase or invest in a financial product. Please contact us if you would like to obtain financial product advice.
Performance data shown represents past performance or simulated performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost.