Tag Archives: Familiarity effect

Mere-exposure effect – Familiarity effect


Mere-exposure effect – Familiarity effect
The mere-exposure effect is a psychological phenomenon by which people tend to develop a preference for things merely because they are familiar with them. In social psychology, this effect is sometimes called the familiarity principle.
http://en.wikipedia.org/wiki/Mere-exposure_effect

This is a tendency for individuals to prefer an option that they have exposed to already or heard of or known already than a totally strange one. This is also to avoid taking unnecessary risks by choosing an option or trying an option that is totally new.
Though there is nothing wrong in making choices with this effect, and it may also help us avoid losses, just because we choose a familiar one, it need not necessarily be the best choice.

Mere-exposure effect examples
1. You would have met someone and you might not have liked him/her much. But, as you continue meeting them or working with them you may start to like them and feel comfortable.
2. We may not like a song when we hear once or twice, but, if the same is repeatedly heard, we start liking it
3. We may not like an advertisement at the first shot, but, by viewing it again and again, we start liking.
4. Buying a particular brand of item – just because we are familiar to it either through advertisements, or we used already few times, or we know our friends and relatives use them.
5. Most of us may not want to try something new on the menu in the restaurant, and hence stick the ones we are already familiar with.
6. Given a situation when we have to trust someone, we prefer to choose someone who we might have already met once, even if we don’t know what they do or where they live, etc., rather than choosing someone who we never met.
7. Most of the population in India stick to insurance products from LIC, buy footwear from Bata, etc.,

Overcoming Mere-exposure effect
1. Making decisions based on facts and figures and proper analysis.
2. Discussing with the right experts on the particular area will help make the right choice.

My experience with Mere-exposure effect
During my earlier days of investing, I always used to buy stocks of familiar names and companies.
I bought stocks of Banks (SBI and HDFC), Auto (Tata Motors and Hero), FMCG (HUL and ITC), Oil & Gas (IOCL and Reliance), Technology (Infosys and TCS). Though these are great brand and fundamentally strong companies, I was able to make smaller profits because I forgot the aspect of margin of safety and hence was buying when their valuations were at their peaks.

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Filed under Behavioural Finance