Familiarity Bias

People tend to be more comfortable in situations that are familiar to them.

What has been called the familiarity bias refers to a human tendency to favor things that you know about over unknown or unique situations.

It makes sense. Familiarity can make you safer.

This is why it is possible for people to live in a city with a relatively high crime rate, but be largely unaffected by it. If they are familiar enough with it to know where not to go when, they do quite well. Whereas a visitor, especially one from another culture may walk into trouble. When natives read about it, their first response is often one of wondering why they were where they were at the time they got into trouble anyway.

Unfamiliar situations set off an acute stress response

In the section of this website on stress I likened the acute stress response to an alarm system, noting that people spend much of their time operating on "auto-pilot". That's good to be able to do. It saves a lot of mental and physical energy for more interesting things.

When things aren't matching up, when what is happening is not already programmed into your mind-body systems as predictable, known, with effective automatic or semi-automatic responses, then it has to get your attention, to wake you up.

This wake-up call feeling is not pleasant. It doesn't feel good. It is a fear response at some level of discomfort or another and it steers you away from the perceived danger.

The "easy" investments are rarely the ones that make you the most.

It has been said in a variety of ways that investments with the greatest potential do not feel good to enter, that you have to be able to make the hard trades to really make money. Familiarity bias is not the only culprit in this difficulty, but it often has a place. Watch out for it.

When you get a "this-is-unrecognized-and-potentially-dangerous" signal, it is the familiarity bias that nudges you to move away from what you don't know, back to what you do know.

It is why so many people have retirement accounts that are full of stock of the company they work for, or the industry they work in, or denominated in their home nation's currency, or based in their home country, even when they know about the value of having a diversified portfolio.

You are already investing you time, energy, and professional future in the company you work for. If it does indeed make sense to you not to keep all your eggs in one basket, you might want to consider carefully whether you also want a majority of your savings to be invested in the same company or the same industry.

The important thing is to remain aware that these cognitive biases exist. If you see a new idea or product come on the scene that you know is a game changer, by all means invest in it.

Just sticking to things with which you're familiar because it's easy can be a problem. You might remember the familiarity bias. Ask yourself if it wouldn't be prudent to go a bit further afield in your investments to even out some risks and maybe get with some positive trends in unfamiliar places.

Return from Familiarity Bias to Retirement Investing

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