Familiarity bias impacts portfolio diversification from "summary" of Beyond Greed and Fear:Understanding Behavioral Finance and the Psychology of Investing by Hersh Shefrin
Familiarity bias can have a significant impact on the way investors choose to diversify their portfolios. This bias refers to the tendency for individuals to prefer investing in assets or securities that they are familiar with, rather than branching out and exploring new opportunities. This can lead to a lack of diversification in a portfolio, as investors may choose to allocate a disproportionate amount of their assets to a small number of familiar investments.
When investors exhibit familiarity bias, they are essentially limiting their exposure to different asset classes and industries. This lack of diversification can increase the overall risk of the portfolio, as it becomes overly dependent on the performance of a few select investments. In the event that these investments underperform or experience volatility, the entire portfolio could be negatively affected.
One reason why familiarity bias impac...
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