Familiarity Bias 😲
🧠 Psych - 51 / 100
Hey, there.
Today, We will be talking about the Familiarity Bias 😲.
What is it?
In simpler terms, The “rule of thumb” you apply when taking decisions or forming new beliefs, judgements.
You prefer to always go with the familiar approach because you (or your family) used to do things that way only.
Example -
A typical example of familiarity bias is the over-allocation of debt assets such as fixed deposits, PPF etc. and almost no exposure in the equity market.
Investors continue to save through these instruments as they have seen their parents and grandparents do the same.[1]
Where does it occur?
The familiar heuristic is said to be primarily associated with investors but it can be seen in situations with moderate risk.
Loss aversion bias is one of the main reasons behind familiarity bias. Investors want to avoid losses and this attitude makes them confined within their comfort zones.
Why do I need to know?
Familiar Heuristic can make you miss out higher returns, possible opportunities and can also make you remain sticked into comfort zone which is not always a good case.
Takeaways:-
The most important step to overcome the familiarity bias is to accept that familiar is not necessarily safe.
The risks and rewards should be understood in detail and the investment decisions should only be based on the objectivity of the outcome. This will lead to more rational and logical decisions, compared to the irrational decisions caused by the behavioural biases.[2]
References & Studies:-
http://pathwayinvestments.in/blog/Familiarity-Bias.pdf
https://www.valuewalk.com/2018/08/familiarity-bias-investing
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