Cognition biases in real estate investment decisions. Empirical evidence from the german development market

Cognitive biases have been intensely studied in security markets so far (Simon 1987). Flyvberg (2005) also found, that project management decisions in the construction of infrastructure suffer from cognitive biases. In the field of real estate development investment decisions no empirical analysis of these social-psychological effects like miscalibration (e.g. Zacharakis/Sheperd, 2001), over optimism (e.g. Heating, 2002) or escalating commitment (Staw/Ross 1987) are known so far. A lot of actual large scale projects like the new Berlin Brandenburg Airport or the new Hamburg Opera House Elbphilharmonie, which is one of the 10 most expensive single building project developments of the last years gives a lot of impressionistically evidence, that the cognition bias of project investment decision makers is one of the most important reasons for running out of time and costs.Therefore we develop a model of cognition biases in real estate development decision situations containing the most relevant biases and the key types of decision makers and situations. Real estate development decisions differ from security investments, because there are several parties who work together in one relatively long lasting project, while they can physically see the project and it's success grow.In a large-scale empirical survey among all types of real estate project decision makers (e.g. sector, hierarchy, personal experience) we analyze and compare the individual degrees of cognition biases with methods coming from the empirical social research. We measure cognition biases and their specific reasons. The results of several univariate and multivariate analyses show heavily cognition biases in real estate investment decisions, which vary intensely between different types of decision makers. Especially in real estate development decisions the degree of bias depends on the individual objective and subjective knowledge and the incentives of the decision maker. We also found evidence, that the degree of the bias in decision situations, which results in inefficiency, is not given, but can reduced by far. So we are able to derive some methodological implications for theory and practice in the field of efficient institutionalizing the project.