What is the familiarity bias?

The familiarity bias is a phenomenon in which people tend to prefer familiar options over unfamiliar ones, even when the unfamiliar options may be better. This bias is often explained in terms of cognitive ease, which is the feeling of fluency or ease that people experience when they are processing familiar information.

How do I avoid falling victim to familiarity bias?

There are a number of techniques traders may find useful when seeking to avoid falling victim to familiarity bias. Acknowledge the bias. Acknowledging the existence of familiarity bias is the first step to avoiding it. Traders may want to be aware of the potential for such bias to affect their decisions. Research thoroughly.

Is financial theory based on familiarity?

Financial theory suggests we should analyze the expected return and risk of each investment. But no, investors tend to trade in the securities with which they are familiar. There is comfort in having your money invested in a business that is visible to you. This familiarity bias has a strong influence on what you buy.

Are investment decisions influenced by behavioural bias?

Investing is no different. It is assumed that investment decisions are perfectly rational decisions. But, in reality, investment decisions are influenced by various behavioural bias. Familiarity bias is one such bias. Familiarity bias is evident in the day to day life.