Illusory truth and inflation hedging
Research on verbal learning by psychologists Hasher et al. showed that repeated statements are easier for people to process, and subsequently seen as more truthful, than new statements; the so called “illusory truth effect”. Later research has confirmed and extended these findings. The limit to this effect is supposed to be knowledge; if you know a statement to be false, you are meant to discard it, however frequently the incorrect statement is repeated. However, some more recent research by Fazio et al. demonstrates that “illusory truth effects occurred even when participants knew better…participants demonstrated knowledge neglect”.
Real estate investing is full of often-repeated, accepted wisdoms. In fact, the real estate investment industry might be lost without them.
Consider the statement, “property is not an inflation hedge”. It doesn’t matter whether the statement is true or not, Fazio et al.’s research would suggest that this statement is likely to be discarded in favour of the often-repeated statement that “property is an inflation hedge”. This statement is so pervasive that it might form one of the half a dozen or so bullet points on a one-page presentation entitled, “The case for property investment”.
A great deal of research has been carried out into the question of whether property is an inflation hedge and it is, at best, inconclusive. For example, the UK’s Investment Property Forum (IPF) published research into the topic of “Property and inflation” in 2011. The research team reviewed the (global) literature to date (listing the conclusions of each study individually) and carried out their own tests of inflation hedging. The first bullet point of the report’s executive summary reads:
“While UK property delivers positive long-run real returns, it is not, in most cases, a hedge against inflation.”
Of course, it is more complicated than that and the authors rehearse many of the issues. Doubtless more research has and will be undertaken regarding this topic but the fact that it needs to be undertaken at all is surely evidence enough that the conclusion that property is an inflation hedge is debatable.
The reality is, probably, that in some circumstances, some properties have been good inflation hedges, but we are less sure about which properties might be in the future. This is in doubt given we don’t know the circumstances under which they may need to be good hedges and whether the characteristics of any properties selected for this purpose will provide the expected results under those circumstances.
These more complex statements fit less comfortably on a presentation entitled “The case for property investment” and, unfortunately, Fazio et al. also state that the ease with which people comprehend statements underlies the illusory truth effect”. “It depends” and “we don’t know” are not confidence-inducing, allocation-winning answers to the question, “Is property an inflation hedge?”