Question

There is strong evidence that many investors suffer from familiarity bias and overconfidence bias. Can you explain why these biases might exist

Answer 1

Answer:

The bias of most investors suffering from familiarity or overconfidence bias can be attributed to human factor of being comfortable with what the person knows. For example, Investor A knows the owner of Company B, he or she would be comfortable to invest in Company B because he or she is familiarize with the owner or the company.

On the other-hand, when an investor reviews the businesses that he or she has invested in that are doing well, the individual will become overconfident in his or her ability to know and find good prospects to invest. The investor will become laid back in doing his investigation before investing in subsequent businesses.

Explanation: