A Study on Familiarity Bias in Investor Decision-Making

Abstract

Abstract: For a considerable amount of time, conventional finance theories have maintained that investors make judgments based on logical analyses and economic models. But the development of behavioral finance casts doubt on this notion, showing that emotions, cognitive biases, and natural tendencies frequently influence human decision-making. This study looks into familiarity bias, a psychological component that affects investor decisions, and how common it is. Using a thorough methodology, the study examines investor choices in the banking, FMCG, and auto mobile industries. Results repeatedly point to a considerable preference for well-known businesses, even in situations when risks and returns on investment are similar. Investors exhibit behavioral biases and brand loyalty; familiarity bias is particularly persistent across various investor profiles. The findings show that investors, irrespective of expertise level, devote a sizeable chunk of their capital to reputable businesses. The results of hypothesis testing show relationships between gender and familiarity bias as well as between different investor types according to holding length and risk. However, monthly income did not show a significant correlation with familiarity bias, indicating that it is prevalent at different income levels. The study comes to the conclusion that a thorough understanding of investor decision-making requires an awareness of behavioral biases.