Heuristics are mental shortcuts that people use in daily life. An article from the Association for Psychological Science includes a story about poor choices made by experienced skiers, some who died in avalanches. Subsequent research identified “familiarity bias” as a contributing factor in many of the avalanche incidents.
Familiarity Bias
Simply put, people experience familiarity bias when they stick with what they know. Doing so helps us make quick consumer decisions, such as selecting a favorite brand of cereal or yogurt or driving a familiar route. It saves time. People are also generally more comfortable with familiar things and dislike the ambiguity of the unknown.
There
is also a downside to familiarity bias. When people think they know something
well, they often “let their guard down” and make serious judgment errors.
Things that are familiar seem “safe” and unthreatening, causing people to
ignore danger signals, like the experienced skiers did. Acceptance by others- and not doing something differently than people we know- is also a key factor in decisions that people make.
A Personal Experience
Recently,
I attended an outdoor “parking lot party” at the Florida community where I
live. Masks were “recommended” but not very visible. Neither was social distancing,
except between my husband and I and another couple, who were sitting at least
eight feet away.
When
one of their neighbors approached my husband to show him a cell phone picture,
I popped my dangling mask over my nose and stepped back. It was awkward, of
course, but I felt safer. It also occurred to me that people at the party were
like those ill-fated skiers. They let their guard down because they were sitting with people that they knew who were not wearing masks (familiarity bias + acceptance bias).
COVID-19 Application of Familiarity Bias
As
Dr. Fauci and other health experts urge caution about indoor Thanksgiving celebrations
next month, they are indirectly discussing familiarity bias (i.e., not believing
that your family members or friends can infect you with COVID-19 because you personally
know them). With 50,000+ new cases per day, however, there are no guarantees.
Ever
the diplomat, Dr. Fauci noted on Good Morning America today that each
family needs to calculate the risk-benefit
of holiday gatherings. He then discussed specific factors to consider
including vulnerable family members with underlying conditions and out-of-town
guests who could sit at airports and on planes or trains for hours.
If
risks outweigh the benefits, it is probably best not to get together, however difficult
or “strange” the decision to forego a traditional family Thanksgiving holiday feels.
Families need to have those conversations now and make alternative plans such
as small group meals and Zoom gatherings with far-away family and friends. If you do decide to get together, set firm expectations on mask-wearing.
Personal Finance Applications of Familiarity Bias
Familiarity
bias is evident in a number of personal finance decisions (or non-decisions)
including:
o
Failure
to compare financial institutions for the best rates on loans (APRs) and
savings (APYs)
o
Failure to
consider investing in non-U.S. stock or mutual fund investments (i.e., home
bias)
o
Failure to
periodically compare insurance company premiums or other large purchases
o Purchasing large quantities of stock because you use a company’s products or work there
Familiarity
is one of many behavioral finance biases that affect daily decisions. Every
workshop on behavioral finance that I have attended suggests that the best thing
people can do to counteract negative effects of various biases is to be aware
of them. Awareness can inform actions to mitigate cognitive errors that result
in poor decisions.
My
posts typically provide financial tips. This one could also save a life. The next
time you are faced with decisions about spending, investing, or getting
together with others (especially indoors for an extended period of time), stop and ask
yourself if the seemingly “safe,” familiar decision is really the right one. Your health
and your wealth may be at stake.
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