Familiarity bias leads investors to favor investments they are familiar with from "summary" of The Little Book of Behavioral Investing by James Montier
One of the most common biases that plague investors is the tendency to favor investments that they are familiar with. This familiarity bias can lead investors to overlook potentially more profitable opportunities simply because they are not as well-known or understood. Investors often feel more comfortable investing in companies or industries that they are already familiar with, even if those investments may not be the most rational or profitable choice. This bias can result in a lack of diversification in a portfolio, as investors may concentrate their investments in familiar sectors or companies, leaving them vulnerable to significant losses if those particular investments underperform. The familiarity bias can also lead investors to ignore important information or warning signs about an investment simply because they are too focused on what they already know. This can result in missed opportunities for profit or increased risk exposure if investors fail to consider all available information when making investment decisions. Overcoming the familiarity bias requires investors to be aware of their tendency to favor familiar investments and to actively seek out new opportunities and information. By diversifying their portfolios and considering a wider range of investment options, investors can reduce the impact of familiarity bias on their decision-making process and improve their overall investment outcomes.- Investors must be willing to step outside of their comfort zones and explore new investment opportunities in order to overcome the limitations imposed by the familiarity bias. By doing so, investors can potentially improve the performance of their portfolios and achieve greater long-term success in the market.
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