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How “Familiarity Bias” May Impact Your Investment Decision-Making

Posted by Seton McAndrews | CFP®, Vice President Investments

July 18, 2017

It’s no secret that investors have a tendency to "get in their own way” when it comes to making investment decisions. As we have written before, you may not be your own best financial planner. The idea that investors often make emotional or ill-informed decisions is not an attribute that is just widely-known and accepted—there is actually an entire field of research devoted to it.

This field of research is known as Behavioral Economics or Behavioral Finance, and people in the field study “inherent biases that plague individual investors.” These biases are often ones that are difficult for individual investors to come to terms with and overcome. Robert Stammers, the Director of Education for the CFA (Chartered Financial Analyst) Institute, frames the role of investor behavior on decision-making into three behavioral biases: overconfidence, familiarity, and anchoring.1 We will focus on the familiarity bias here.

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Familiarity Bias Investing 101

Doug's Quiz Corner: Familiarity Bias

February 21, 2017
Quizmaster, Doug Hutchinson, presents his quiz for the month. Here, Doug discusses the pitfalls of familiarity bias. Consider this Scenario: Your friend Jake is considering different investment options and he asks for your advice. "I'm thinking about investing my retirement account in a tech sector equity strategy. I've worked in the tech industry for years and I know the space well so that is the area of the stock market that I'm most comfortable with." "I'm also thinking about investing some funds in my personal brokerage account in the equity of a local Fortune 500 Company. I know a couple of people in my circle of friends who work there so I feel comfortable investing in that company's stock." What feedback should you give Jake about his investment decision making process? [+] Read More