The familiar versus the unfamiliar: Familiarity bias amongst individual investors

Abstract

Purpose: The purpose of this study was to investigate the existence of familiarity bias amongst individual investors in the South African stock market. Problem investigated: According to Warren Buffet, one needs to maintain emotional detachment if one wants to be a successful investor. However, recent research indicates that the perceptions of companies’ products and brands may influence individuals’ investment decisions in the stock market. This phenomenon implies that the investment decisions of individual investors are not purely based on firm fundamentals as suggested by traditional finance theories, but might be driven partly by the positive or negative attitude they have towards certain companies’ products and brands. The existence of familiarity bias amongst individual investors was investigated to determine if individuals prefer to invest in companies they are familiar with as opposed to unfamiliar companies. Methodology: A quantitative approach was followed. An online survey was used to show images of familiar and unfamiliar company brands to respondents, whereafter respondents were asked to indicate whether they will invest in the shares of the identified companies. The statistical analysis entailed descriptive statistics as well as one-way analyses of variance to test the stated hypotheses. Main findings: The results of this exploratory study indicate that investors do exhibit familiarity bias when choosing between different companies to invest in. Value of the research: The inclination of individual investors to invest in familiar corporate brands can have implications for the marketing industry, financial markets, the performance of companies as well as the investment performance of individual investors in the sense that it would seem that company brands could have an influence on investment decisions.

Navigating selected perceived risk elements on investor trust and intention to invest in online trading platforms

“…Despite the growing body of research on online trading platforms, there is still lack of understanding about the impact of perceived security risk, perceived privacy risk, perceived financial risk and perceived fraud risk on investor trust as well as the intention to invest in online trading platforms in Africa. Precisely, within the South African context previous studies have conducted their studies in various contexts by focusing on the relationship between foreign direct investment and economic growth in South Africa (Masipa 2018); a few South African cents' worth on Bitcoin (Nieman 2015); the relationship between the exchange rate and the trade balance in South Africa (Chiloane, Pretorius & Botha 2014); responsible investing in South Africa (Viviers & Els 2017); familiarity bias among individual investors (De Vries, Erasmus & Gerber 2017) and a South African perspective on the investment performance of ethical funds compared to conventional funds and investor behaviour as regards ethical funds (Patel 2016). This shows that there is scant evidence of studies focusing on how perceived security risk, perceived privacy risk, perceived financial risk and perceived fraud risk impact investor trust and the intention to invest in online trading platforms in South Africa.…”

Effect of Investment Knowledge, Entrepreneurship and Brand Familiarity of Mutual Fund Platform Toward Student Investment Interest

“…The analysis showed that the hypothesis H3 brand familiarity platform supported mutual funds affect the interests investasiDalam financial behavior theory (Behavioral Finance Theory) states that the investment decision of a person can be influenced by a person's emotional and cognitive factors. The sense of familiar and unfamiliar to a brand it will display the confidence and desire to continue to use or even pulled sacrifice of investing money for the companies that are considered familiar.Brand familiaritymay be one reason to invest because of humans is a subject that has emotions can be influenced by the environment, eg a company or a brand of the most frequent and convenient to use [6,20]. The proximity and experience (familiarity), realistic, self-control and social interaction does not have a significant effect on the behavior of an investor to make his choice in investing [19].…”

The Effect of Salience and Disposition Effect on Stock Investment Decisions on Investors in Surabaya

“…This study departs from the assumption that the deviation of company stock prices is caused by investors who act irrationally (Barberis & Thaler, 2002). This implies that an investor's investment decision is not based on a company's fundamental analysis but is based on investors' perceptions of a company or brand (De Vries, Erasmus, & Gerber, 2017).…”

“…When doing investment activities, an investor not only judges based on the fundamental analysis of a company but also sees based on the perceptions they build on a company or brand. (De Vries, Erasmus, & Gerber, 2017). This statement is contrary to traditional financial theory which assumes that human behavior when making decisions is rational and financial market conditions are described as efficient markets (Yalcin, Tatoglu, & Zaim, 2016).…”