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Familiarising with the "Familiarity Bias"

In one of my previous avatars as an investment consultant at Willis Towers Watson in London, I used t
Familiarising with the "Familiarity Bias"
By Making smalltalk • Issue #18 • View online
In one of my previous avatars as an investment consultant at Willis Towers Watson in London, I used to advise sovereign wealth funds & large pension funds on fixed income investments. We’d help them formulate their investment strategy & then implement it by using the services of global asset management companies, hedge funds, and private equity funds.
When you have billions of dollars to invest like pension funds, diversification & asset allocation become even more integral to performance than individual stock/security selection.
How much to invest in equities vs. fixed income? How much in domestic, global, and emerging markets? Which countries within emerging markets will do well? These are the kinds of questions that such investors are most concerned with.
One of the most “watchlisted” countries on the radar of such institutional investors was - and perhaps still remains - our very own India. Despite the stellar long-term performance of Indian capital markets and the thumping victory of PM Modi in 2014, most institutional investors still didn’t invest in the Indian markets back in 2015/2016, even though almost all were closely looking at it.
Political risks, corruption, lack of developments, risk of slowing growth, inflation - these were the common risks & concerns cited by most such foreign investors regarding India.
As an investor & advisor, I understood their concerns - these were legitimate risks that such large investors absolutely must analyse, mainly due to the size of their investment.
Yet, there was another unsaid concern/issue that stopped most investors from taking the leap - it was the lack of familiarity. Most decision makers didn’t really understand how India functioned as a country - its systemic corruption, fluctuating growth, and socio-political dynamics were a knowledge based on information read in reports & newspapers, but not really experienced in-person.
As such, there was this element of familiarity bias which stopped many such institutional investors from investing in India, even though it was a wonderful opportunity.
As an Indian who was born & brought up in India, I could tell them how India’s moved ahead despite these risks, and if anything, the situation is far better economically than it ever was before. But I couldn’t really make them see this.
If you can’t imagine why anyone would think like this or not see this, ask yourself - would you invest in the Bangladeshi stock market?
Most people I’ve asked this question to have first feigned surprise at even the consideration of Bangladesh as an investment - and then quickly decided against it. That’s because most people still think of Bangladesh as a poorer-than-India, really populous, and corrupt country.
But just like India a few years back, Bangladesh is actually not what it seems like & presents a great investment opportunity today - not only because of its potential but equally because most people don’t see it yet.
The moral of this story is that as an investor whose primary objective is to earn returns, we should always be open to moving out of our comfort zone. We certainly shouldn’t invest in things we don’t understand, but we should also remember to not let our familiarity bias to get in the way of learning about (and making) new investments. Happy investing!
-Vikas Bardia

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