So, what is Familiarity Bias?
Sticking to the same dish on a menu at a restaurant, always shopping at the one supermarket, or only using the same brands over and over – these are just a few ways Familiarity Bias exhibits itself in our daily lives, often disguised as routines.
The second article in our ‘Achieving an Optimal Life’ series concentrates on a significant behavioural bias that impacts investors – Familiarity Bias.
Familiarity bias is the preference to stay within our comfort zone and overvalue the choice that we already know. As humans we can sometimes feel uncomfortable or unsure when trying new things. Therefore, we can tend to revert to old habits to stay within that comfort zone, which can sometimes come at a cost of missing out on new and better outcomes.
Here are some real-world examples.
Home Country Bias is a type of Familiarity Bias which can influence the way we invest.
Familiarity Bias occurs when investors choose to invest in asset classes or stock exchanges that they already know and are familiar with. For Australian investors, this could present itself through Home Country Bias, a form of Familiarity Bias. Home Country Bias occurs when an investor favours investing in companies listed on their domestic stock exchange over those on foreign exchanges. They believe more in the choice that they recognise and are aware of. Their discomfort arises from the unfamiliarity.
John is exhibiting Home Country Bias.
By only investing in Australian shares, John is placing all his eggs in one basket and his portfolio may lack risk management overlays such as diversification. This could result in a suboptimal return on his investment assets.
‘Don’t put all your eggs in one basket’
To keep Familiarity Bias at bay, consider looking at different investment options and undertake research to see how they can work for you. It is our individual responsibility to keep challenging ourselves and growing our financial literacy and understanding. By acknowledging our biases, and being open to learning about them, we are already taking an important first step.
Diversification is a great tool that is used by investors to overcome Familiarity Bias. With the help of an advisor, mixing a wide variety of investment assets in your portfolio can help to mitigate risk.
At Viridian, we empower our clients to think critically and objectively about their financial decisions. By adding an advisor to the equation, you can become more aware of Familiarity Bias and make decisions to ensure an optimal life is achieved.
David Pitt is an Executive Advisor at Viridian Advisory.
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