Do you often take the same route for your commute to the office? Do you often shop at the same store and visit the same restaurant? Have you ever wondered why we prefer things that we are familiar with?
Cognitive biases can influence our decision-making process, and familiarity bias or mere exposure effect is one of them. In our ongoing personal finance bias series, in this blog, we will explore the familiarity bias.
We’ll break down the concept, understand how it affects your personal finances, and equip you with strategies to break free from this bias. So, let’s get started!
Estimated read time: 2 minutes and 30 seconds
Buckle up. Here we go!
What is familiarity bias?
Imagine you’re at your favourite restaurant, flipping through the menu. You’ve tried a particular dish multiple times, and it’s always satisfied your taste buds. Naturally, your eyes lean toward that trusted favourite.
That, my friends, is the essence of familiarity bias – the human tendency to favour the familiar over the unfamiliar.
In the context of personal finance, familiarity bias refers to our inclination to invest in assets or financial products that we are more familiar with, rather than exploring other potentially better options.
How does familiarity bias affect your personal finances?
1. Home bias
This is a classic example of familiarity bias. Many investors in India tend to put a significant portion of their investments into domestic assets, like real estate or stocks. While it’s not necessarily bad, it becomes a problem when it prevents you from diversifying your investments globally. Diversification helps spread risk and can lead to better returns in the long run.
2. Preference for traditional investments
Fixed deposits, gold, and real estate have been staples of Indian investment portfolios for generations. These are considered safe and familiar options. But you might overlook other potentially profitable investments in areas you’re less familiar with, simply because you don’t understand them as well. This can limit your ability to grow your wealth over time.
3. Relying on Recommendations
Many people rely on recommendations from family and friends for financial decisions. While these suggestions can be well-intentioned, they might not align with your financial goals or risk tolerance. This bias can limit your exploration of more suitable options for your specific needs.
5 Strategies to overcome familiarity bias
Now that you understand how familiarity bias can affect your personal finances, let’s explore some strategies to overcome it and make more informed decisions:
1. Educate yourself
The first step to overcoming familiarity bias is to educate yourself. Learn about different financial instruments and investment options. Understand the risks and returns associated with each. The more you know, the less reliant you’ll be on what’s familiar.
2. Practice mindfulness
Mindfulness practices, such as meditation or self-reflection, can help you become more aware of your biases and make more deliberate and objective decisions.
3. Diversify your experiences
Expanding your experiences and exposure to different things can help to reduce the influence of familiarity bias. By exposing yourself to new and unfamiliar things, you can broaden your perspective and challenge your assumptions.
4. Use objective criteria
Emotional decisions often lead to poor financial outcomes. When evaluating investments, making decisions based on objective criteria, such as data and evidence, can help to reduce the influence of familiarity bias. By relying on objective criteria, you can make more informed and rational decisions.
5. Consult financial professionals
Seek advice from financial advisors or planners. They can help you make informed decisions based on your unique financial situation and objectives. A professional’s perspective can offer a fresh outlook and reduce the impact of familiarity bias.
In the ever-evolving world of personal finance, familiarity bias is a common pitfall that can hinder your growth. It’s crucial to recognize and address this bias to make informed, well-rounded investment decisions.
Remember, always sticking with what we know limits our exposure to new things, ideas, and viewpoints. This limits the range of choices we are able and willing to consider when making future decisions and narrows the perspective from which we make them.
So, keep learning, diversify your experience, and seek professional guidance when needed.
Share these insights with your buddies. Until next time!
If you are like us, who likes to analyse a little more or check out content in different formats, well you are in luck. Below you can find some suitable content we found.
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