Impact of familiarity bias on investor’s reluctance to realize losses.

What is it about?

We found that familiarity bias enforces the disposition effect. We conducted 714 tests in which different respondents could sell stocks of two types – winners and losers. One group of respondents ‘‘owned’’ familiar assets and another group operated anonymous portfolios. The results of the experiment show that an individual investor’s tendency to ride losers too long is more than twice as high in the case of unfamiliar stocks as it is when assets are familiar to the holder.

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Why is it important?

The research results can be successfully implemented in the field of market trade and investments. Since familiarity increases an investor’s reluctance to sell losers, it could significantly protect issuer’s market capitalization. The holders of familiar stocks are able to support prices and probably to prevent prices from plummeting. Accordingly, by means of regular and credible provision of information to shareholders, company managers can reduce the amount of panic selling in the fall of market prices or in times of crisis.