The familiar versus the unfamiliar: Familiarity bias amongst individual investors

Abstract

Purpose: The purpose of this study was to investigate the existence of familiarity bias amongst individual investors in the South African stock market. Problem investigated: According to Warren Buffet, one needs to maintain emotional detachment if one wants to be a successful investor. However, recent research indicates that the perceptions of companies’ products and brands may influence individuals’ investment decisions in the stock market. This phenomenon implies that the investment decisions of individual investors are not purely based on firm fundamentals as suggested by traditional finance theories, but might be driven partly by the positive or negative attitude they have towards certain companies’ products and brands. The existence of familiarity bias amongst individual investors was investigated to determine if individuals prefer to invest in companies they are familiar with as opposed to unfamiliar companies. Methodology: A quantitative approach was followed. An online survey was used to show images of familiar and unfamiliar company brands to respondents, whereafter respondents were asked to indicate whether they will invest in the shares of the identified companies. The statistical analysis entailed descriptive statistics as well as one-way analyses of variance to test the stated hypotheses. Main findings: The results of this exploratory study indicate that investors do exhibit familiarity bias when choosing between different companies to invest in. Value of the research: The inclination of individual investors to invest in familiar corporate brands can have implications for the marketing industry, financial markets, the performance of companies as well as the investment performance of individual investors in the sense that it would seem that company brands could have an influence on investment decisions.

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Acta Commercii - Independent Research Journal in the Management Sciences
ISSN: (Online) 1684-1999, (Print) 2413-1903
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Authors:
Annalien De Vries1
Pierre D. Erasmus1
Charlene Gerber2
Aliaons:
1Department of Business
Management, Stellenbosch
University, South Africa
2Business School,
Stellenbosch University,
South Africa
Corresponding author:
Annalien De Vries,
devriesa@sun.ac.za
Dates:
Received: 27 Nov. 2015
Accepted: 28 Aug. 2016
Published: 02 Feb. 2017
How to cite this arcle:
De Vries, A., Erasmus, P.D. &
Gerber, C., 2017, ‘The
familiar versus the unfamiliar:
Familiarity bias amongst
individual investors’, Acta
Commercii 17(1), a366.
hps://doi.org/10.4102/
ac.v17i1.366
Copyright:
© 2017. The Authors.
Licensee: AOSIS. This work
is licensed under the
Creave Commons
Aribuon License.
Introducon
Traditional finance theory attempts to give an understanding of financial markets by applying
models that are based on the assumption that individual investors are rational and, therefore,
hold well-diversified portfolios. For years, this assumption of individual rationality has been
accepted as the cornerstone of traditional finance models. According to these models, the
market price of a security is equal to its fundamental value. The fundamental value (also
referred to as book value or intrinsic value) of a stock refers to the value of the stock based on
financial statement analysis, without referring to its value in the market. The reason behind the
argument that price equals fundamental value is based on the Efficient Market Hypothesis
(EMH). If stock prices deviate from their fundamental values, rational investors would
immediately recognise and react to this, thereby correcting the mispricing. However, empirical
evidence (Cutler, Poterba & Summers 1991; Jegadeesh & Titman 1993; Mun, Vasconcellos &
Kish 2000) shows that various irregularities in the market (e.g. excess volatility, overreaction
and underreaction to news announcements, equity premium puzzle) exist, which result in the
mispricing of stocks; furthermore, they also show that these mispricings are not immediately
corrected by rational traders as predicted by the EMH. This evidence indicates that the
traditional finance models cannot fully explain the functioning of financial markets (Barberis &
Thaler 2002; Kourtidis, Sevic & Chatzoglou 2011).
The inability of the traditional finance models to explain these irregularities in the market
brought about the emergence of behavioural finance as a field of study. Contrary to the
traditional finance framework, behavioural finance theory argues that the deviations of stock
prices from its fundamental values may be attributed to the presence of irrational traders in the
market (Barberis & Thaler 2002). This implies to an extent that the decisions made by individual
investors are not based on a company’s fundamental values but are rather driven by their emotions.
Purpose: The purpose of this study was to investigate the existence of familiarity bias amongst
individual investors in the South African stock market.
Problem investigated: According to Warren Buffet, one needs to maintain emotional
detachment if one wants to be a successful investor. However, recent research indicates that
the perceptions of companies’ products and brands may influence individuals’ investment
decisions in the stock market. This phenomenon implies that the investment decisions of
individual investors are not purely based on firm fundamentals as suggested by traditional
finance theories, but might be driven partly by the positive or negative attitude they have
towards certain companies’ products and brands. The existence of familiarity bias amongst
individual investors was investigated to determine if individuals prefer to invest in companies
they are familiar with as opposed to unfamiliar companies.
Methodology: A quantitative approach was followed. An online survey was used to show
images of familiar and unfamiliar company brands to respondents, whereafter respondents
were asked to indicate whether they will invest in the shares of the identified companies. The
statistical analysis entailed descriptive statistics as well as one-way analyses of variance to test
the stated hypotheses.
Main findings: The results of this exploratory study indicate that investors do exhibit
familiarity bias when choosing between different companies to invest in.
Value of the research: The inclination of individual investors to invest in familiar corporate
brands can have implications for the marketing industry, financial markets, the performance
of companies as well as the investment performance of individual investors in the sense that it
would seem that company brands could have an influence on investment decisions.
The familiar versus the unfamiliar: Familiarity bias
amongst individual investors
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As a result, the finance literature often portrays individual
investors as unsophisticated ‘noise’ traders who are subject
to psychological biases (Kaniel et al. 2012). Therefore, this
new phenomenon seems to suggest that some financial
market anomalies might be better understood and explained
by using financial models that relax the assumption of
individuals being fully rational.
Various financial biases have been identified by critics of
the EMH to support their arguments that investors are
generally irrational. These biases include amongst others,
overconfidence (Barber & Odean 2001), mental accounting
(Thaler 1985), regret and loss aversion (Kahneman &
Tversky 1979), herding (Lakonishok, Shleifer & Vishny
1992), overreaction (De Bondt & Thaler 1987) and familiarity
(Huberman 2001). The latter bias has received extensive
attention from researchers in the last two decades, which
provides mounting evidence of the impact of familiarity on
the investment decisions made by individuals.
Familiarity bias refers to the preference of individual
investors to invest in the shares of companies that are familiar
to them (Baker & Nofsinger 2002; Grullon, Kanatas & Weston
2004; Huberman 2001; Speidell 2009). If individuals are
presented with two alternatives, they would generally
prefer the alternative they are more familiar with rather
than the unfamiliar. According to Fox and Tversky (1995),
this preference is also demonstrated when selecting stocks
for investment purposes. The inclination towards the familiar
and the dislike or apprehension of the unfamiliar culminate
in the basic result that investors simply prefer to invest
in securities that are familiar to them (Huberman 2001). It
appears that the behaviour of investors in the financial
market is closely related to the behaviour of consumers in the
product market. According to Chira, Adams and Thorton
(2008), the perceptions individuals have about specific brands
tend to be influenced by how familiar they are with the
products associated with those brands. Aspara and Tikkanen
(2008:85) promote the idea that individuals’ attitudes towards
a company, their tendency to invest in a company’s shares
and their tendency to buy the products of a company are
likely to interact. This implies that individuals tend to invest
in the shares of companies based on the good experiences
they had with those companies’ products and, conversely,
individuals tend to buy products from companies in which
they hold shares (Aspara & Tikkanen 2008). Therefore,
individual investors may prefer to invest in the shares of
certain companies partly because of the positive attitudes
they have towards the companies’ products and brands
(Aspara & Tikkanen 2008).
This perspective on individual investment decisions is
important. If stock holdings by individual investors are
influenced by psychological features, such as familiarity bias,
it could influence the prices of securities and have important
implications for stock characteristics such as risk and return
and, consequently, also firm value. Furthermore, familiarity
bias would suggest that investors hold suboptimal investment
portfolios. Therefore, reducing familiarity bias could result
in greater diversification, which in turn could lead to higher
returns and lower risk for investors. Thus, familiarity bias
becomes an important factor to consider when focusing on
individual investment decisions and the potential impact it
could have on stock markets.
Extensive research (Baker & Nofsinger 2002; Grullon et al.
2004; Huberman 2001) on the influence of familiarity bias
on investment decision making has been conducted in
various countries and provide ample evidence that this
particular bias is present when individuals make investment
decisions. Research on individual investors, per se, and
specifically on the biases portrayed by these investors is
limited within the South African context. Therefore, this
article aims to contribute to the South African finance
literature by investigating the presence of familiarity bias
amongst individual investors. Based on the evidence from
prior international studies (Baker & Nofsinger 2002; Foad
2010; Grullon et al. 2004; Huberman 2001), it is expected
that the phenomenon of familiarity will also be evident in
the investment decisions of South African investors. If this
is the case, it is important to investigate this topic further to
determine the potential impact it can have on the investment
decisions made by individuals as well as the South African
stock market.
The section that follows reviews the psychological literature
and how familiarity affects judgement and investment
decision making. This section focuses specifically on literature
from the field of behavioural finance as well as economic
psychology. The methodology applied in an attempt to
answer the research question as well as the empirical findings
and deductions will then follow. The final section concludes
by considering the implications of familiarity bias on asset
valuation and relates the resulting distortions to traditional
finance theory, before suggesting areas for future research
relating to familiarity bias in investment decision making.
Literature review
An in-depth literature review was conducted and the
following sections provide a discussion on the concepts of
traditional finance and behavioural finance theories, the
impact of familiarity bias on investment decisions and lastly
the link between brand knowledge and investment decisions
made by individuals.
From tradional nance to behavioural nance
Traditional finance theory suggests that the pricing of
securities in financial markets should be done according to
the quality of their underlying fundamentals (MacGregor
et al. 2000:104). Furthermore, it seeks to give an understanding
of financial markets using models (such as the capital asset
pricing model and the arbitrage pricing theory) in which all
investors are assumed to be fully rational (Barberis & Thaler
2003:1053). Therefore, in the traditional finance framework
where all investors are assumed to be rational, the price
of a security should be equal to its fundamental value.

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This theory is based on the EMH that posits that all
information has already been reflected in a security’s price
and that the current price that the security is trading for
on any particular day is its fair value (CIMA 2012:93). If
security prices deviate from their fundamental values,
an attractive arbitrage opportunity is created. However,
rational arbitrageurs in the market will immediately take
up this arbitrage opportunity which will bring prices to
their fundamental values, hence keeping markets efficient.
Another important feature of traditional finance theories is
the trade-off between risk and return (Ricciardi & Simon
2000). Theories of traditional finance predict a strong positive
relationship between the risk and expected return of a
security. The prediction of a positive risk–return relationship
is based on the rationality of investors who judge risk and
return characteristics exclusively based on the fundamental
information of the particular security (Kempf, Merkle &
Niessen-Ruenzi 2014:995). This argument suggests that
rational investors should hold well-diversified portfolios in
which a collection of shares produces the maximum expected
return given the amount of risk assumed.
Therefore, the central assumption of the traditional finance
models is that individual investors are rational when making
investment decisions and consequently hold well-diversified
portfolios. However, several research papers have reported
evidence that is contrary to these arguments of the traditional
framework. Empirical evidence suggests that stock markets
are not perfectly efficient, prices are not always equal to
its fundamental values, individual investors do not always
consider the risk and return characteristics of securities and
overall they tend to hold poorly diversified portfolios. This
contradicting evidence indicates that the basic understanding
of the functioning of financial markets and the trading
behaviour of individuals are not easily understood by
the traditional finance framework (Barberis & Thaler 2002;
Kourtidis et al. 2011). According to Barber and Odean (2011:36),
the contradicting evidence to the rationality assumption on
which the traditional finance models were built show that
the investors who inhabit the real world and those who
populate academic models are distant cousins (Barber &
Odean 2011:36). Nagy and Obenberger (1994) argue that
the traditional finance models cannot fully explain the
functioning of financial markets because these models focus
on the development of macro models that explain aggregate
market behaviour and do not typically address the decision
process of individual investors. This resulted in a shift
in the focus of finance research from the aggregate market
behaviour to the behaviour of an average, sometimes
irrational, individual investor. The significance of individual
investors’ participation in financial markets has led to the
emergence of the field of behavioural finance, which is a
subdiscipline of behavioural economics.
Behavioural finance examines the choices made by various
financial market participants, from private individuals to
institutional investors; furthermore, it examines how these
choices affect financial markets (De Bondt et al. 2010).
Contrary to the traditional finance framework, behavioural
finance suggests that deviations of security prices from their
fundamental values may be attributed to the presence of
irrational traders in the market (Barberis & Thaler 2002).
According to Barber and Odean (2001:288) ‘behavioural
finance relaxes the traditional assumptions of financial
economics by incorporating observable, systematic, and
very human departures from rationality into standard
models of financial markets’. This implies to an extent that
the investment decisions made by individual investors are
not solely based on the fundamental values of a firm, but
might rather be driven by their own emotions. Therefore,
individual investors are often portrayed in the finance
literature as unsophisticated ‘noise’ traders, who are subject
to psychological biases (Kaniel et al. 2012). Therefore,
contrary to traditional finance, behavioural finance theory
considers psychological aspects to be of great importance in
understanding the decision-making process of investors.
According to De Bondt et al. (2010), behavioural finance is
informed by three strands of psychology to explain the
behaviour of individual investors. The first strand, namely
cognitive psychology, focuses on how the minds of individuals
undertake the necessary calculations that are required to
maximise wealth. The second strand is social psychology,
which recognises the need to find acceptance of individuals’
acts (De Bondt et al. 2010:31). Emotional responses to the
intensity of trading is the third strand of psychology identified
by De Bondt et al. (2010), which focuses on the decision-
making process being more than a strictly calculative process
(De Bondt et al. 2010:31).
The third strand, namely emotional responses, has received
extensive attention by researchers in recent years in an
attempt to explain and understand the reasoning patterns
of investors, including the emotional processes involved
and the degree to which they influence the decision-making
process (Ricciardi & Simon 2000:2). Various financial biases
have been identified to support the argument that investors
are irrational and base their decisions primarily on their
emotions. These biases include amongst others, overconfidence
(Barber & Odean 2001), mental accounting (Thaler 1985),
regret and loss aversion (Kahneman & Tversky 1979), herding
(Lakonishok et al. 1992), overreaction (De Bondt & Thaler
1987) and familiarity (Huberman 2001).
In-depth research has been conducted to explain and justify
all of above-mentioned biases. Familiarity bias in particular
has received much attention by international researchers
in the field of psychology and behavioural finance. This
bias appears to be a dominant factor in explaining the
irrationality of individual investors and, thus, forms the
focal point of this article.
Familiarity bias
When individuals are presented with two alternatives,
they will usually prefer the alternative they are more
familiar with (Fox & Tversky 1995). This notion is also

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valid when deciding on which stocks to include in an
investment portfolio. According to Huberman (2001), the
preference for the familiar and the distaste for the
unfamiliar causes individuals to invest in the stocks of
companies they are familiar with. Therefore, familiarity
bias is the preference for investing in the shares
of companies that are familiar to the individual investor
(Baker & Nofsinger 2002; Grullon, et al. 2004; Huberman
2001; Speidell 2009). This finding contradicts the traditional
finance framework because it suggests that individuals, in
part, base their investment decisions on their familiarity
and association with a stock rather than on the
fundamentals of that particular stock.
There are a couple of rationales for the existence of
familiarity bias in investment decisions. Firstly, there is the
argument of professional or geographical proximity, which
suggests that investors tend to invest in the stock of
companies they work for and they are also more likely to
invest in the stock of companies that are located near them
(Massa & Simonov 2002). This behaviour by investors may
be attributed to the fact that they feel more comfortable
with companies that they know well and/or hear about
frequently. A further explanation for familiarity bias is
suggested by a lack of diversification (Foad 2010:277).
According to Boyle et al. (2012), investors tend to hold a
substantial amount of their overall investment in just a few
assets, often those with which they are familiar, instead of
holding a well-diversified portfolio. When investors limit
their investment portfolio to only stocks that are familiar to
them, they may forfeit higher returns and lower risks
available in other unfamiliar securities. This strong
preference for familiar securities consequently results in a
lack of portfolio diversification. Lastly, asymmetric
information is considered as another rationale for familiarity
bias and suggests that investors may choose to invest in
familiar securities simply because they have more
information about it (Foad 2010:286). Investors are exposed
to asymmetric information when dealing with assets that
are unfamiliar to them. These information asymmetries are
relevant, especially when considering investments in
foreign assets (Foad 2010). Studies find that investors prefer
to invest in local assets with which they are more familiar,
in spite of the benefits and gains from international
diversification (Foad 2010:278). Investors’ preference for
local assets as opposed to foreign assets is referred to as
local and home bias. Numerous studies have suggested that
local bias might be a rational response to better information
and knowledge about familiar assets (Foad 2010:279).
Together, these rationales provide strong evidence that
individuals invest in the familiar while often ignoring the
principles of portfolio theory (Huberman 2001:659). The
general conclusion of researchers is that people prefer to
bet in an environment where they consider themselves
knowledgeable or competent rather than in an environment
where they feel ignorant or uninformed (Huberman
2001:660). Therefore, it is unlikely that an investor would
choose to invest in a company without having any prior
knowledge of that particular company. Familiarity bias is
also evident in the marketing sector. According to Chira
et al. (2008:13), individuals’ perceptions of brands are
influenced by how familiar they are with the products
associated with those particular brands. When making a
purchasing decision, consumer confidence is usually
higher if familiarity with a particular brand is higher,
which might often result in a decision that is faster and
produces results consumers feel more comfortable with
(Chira et al. 2008:13). This purchasing behaviour of
consumers in the market section seems to spill over to the
behaviour portrayed by individual investors in the stock
market. Frieder and Subrahmanyam (2005) report results
that support this notion that individuals prefer to invest in
stocks of companies of which they have more information
and knowledge about. This behaviour was actually
encouraged by one of the best mutual fund managers of all
time, Peter Lynch, who wrote ‘buy what you know’
(Lynch & Rothchild 2000). According to Lynch, one is more
likely to be successful if one invests in companies that are
familiar (Ferri 2014).
The link between brand knowledge and
investment decisions
It appears that perceptions of companies’ products and
brands do not only possibly influence consumer behaviour
but also the behaviour of individual investors when
making investment decisions. Research by Aspara and
Tikkanen (2010) suggests that individuals seem to be
willing to invest in certain companies’ stock beyond its
expected financial risk and return characteristics. Aspara
and Tikkanen (2010:3) identified two variables that explain
the willingness to invest in stocks beyond its expected
financial returns. The first variable is an individual’s
affective evaluation of a company’s product brand. The
second variable relates to the perceived personal relevance
attached to domains (heterogeneous activities, areas of
interests) presented by the company’s product categories
(Aspara & Tikkanen 2010:213). These findings lend support
to an earlier study conducted by Aspara and Tikkanen
(2008:85), which introduced the idea that individuals’
attitudes towards a company, their tendency to invest in a
company’s shares and their tendency to buy the products
of a company are likely to interact. This interaction is
further complicated in the case of a relatively unfamiliar
holding company with familiar subsidiary companies.
Investors may have a strong positive affect with the
subsidiary company, but may be unaware that this
subsidiary forms part of a particular holding company.
Therefore, individuals tend to invest in the shares of
companies based on the good experiences they had with
those companies’ products and, conversely, individuals
tend to buy products from companies in which they hold
shares. Therefore, individual investors may prefer to
invest in the shares of certain companies partly because of
the positive attitudes they have towards the companies’
products and brands (Aspara & Tikkanen 2008).

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The consumption and investment markets have predominantly
been considered to be isolated from each other. However,
based on the extensive research in the field of behavioural
finance, and in particular familiarity bias in investment
decision making, it seems pivotal that these two fields of
study should not be viewed in isolation, but rather as
complements to each other.
Research objecves and hypotheses
Extensive research on the topic of familiarity bias in
individual investment decision making has been conducted
in various countries, which provide ample evidence that this
particular bias is portrayed in the investment decisions made
by individuals (Aspara & Tikkanen 2008; Baker & Nofsinger
2002; Foad 2010). Despite the majority of international
research in the field of behavioural finance and in particular
on familiarity bias, there seems to be a paucity of research in
South Africa. It would seem that this article appears to be
the first in South Africa to investigate the effect of familiarity
bias on investment decisions in South Africa. Therefore,
this article contributes to the South African literature
by investigating the existence of familiarity bias amongst
individual investors in South Africa. Therefore, the main
research objective of this article was to assess if there is a
difference between individuals’ likelihood to invest in
familiar corporate brands compared to unfamiliar corporate
brands. Given this objective, the following hypotheses were
postulated:
H1: There is a difference between individuals’ likelihood to invest in
familiar corporate brands compared to unfamiliar corporate brands.
H2: There is a difference between individuals’ likelihood to invest in
a subsidiary company compared to its listed holding company’s
corporate brand.
Methodology
Materials and procedure
In current literature, the majority of studies measure
familiarity by asking respondents to describe their knowledge
and evaluations of a particular company. Alternatively,
respondents are asked to indicate on a rating scale their
familiarity or identification with a specific brand (Aspara
2013; Aspara & Tikkanen 2011). In these questions, the name
of the company is usually provided instead of an image or
picture relating to the brand of the company. In the endeavour
to assess the likelihood to invest in a familiar corporate
brand compared to the likelihood to invest in an unfamiliar
corporate brand, brand measurement theory was applied to
measure brand familiarity. Researchers concur that in the
measurement of brand familiarity, information on brand
awareness should be collected (Aaker 1996; Hart & Murphy
1998; Hoyer & Brown 1990). Brand awareness refers to
individuals’ ability to identify a brand under different
conditions (Aaker 1996; Kotler & Keller 2006) and enable
researchers to quantify levels and trends in brand knowledge
(Farris et al. 2006). As individuals do not recall all brands
equally often or with equal ease (Tybout & Calkins 2005),
Keller (2003) suggests that aided measures of brand awareness
could be used. These measures include individuals being
required to discriminate between a stimuli, which might be
words, objects or images, as something they have previously
seen (Farris et al. 2006; Keller 2003). For purposes of this
article, respondents were requested to differentiate between
various companies’ brands (i.e. images or ‘pictures’).
Specifically, companies’ listed corporate brands were used.
In selecting the relevant listed corporate brands used in this
article, the researchers selected 10 brands that they considered
to be unfamiliar and 20 brands that they considered to be
familiar based on company size. The 10 unfamiliar brands
represent small companies that were classified as Small Cap
shares on the JSE (J202), while the 20 familiar brands
correspond to larger companies that were constituents of
either the FTSE/JSE Top 40 (J200) or the FTSE/JSE Mid Cap
(J201) indices. In an attempt to classify these 30 corporate
brands as familiar and unfamiliar, the brands were presented
to 20 management experts (financial, investment and
marketing) in a pilot study. Results of the pilot study allowed
for seven brands to be included in the final questionnaire. Of
these seven brands, four brands were rated as very familiar
(SAB Miller, Foschini Group, Truworths, and Pick n Pay) and
three were rated as very unfamiliar (Austro, Deep Yellow
and Corwill Investment Holdings). The corporate brands
used to assess brand familiarity are illustrated in Table 1.
When using corporate brands to measure brand familiarity,
care should be taken to ensure that the correct colours
and images are displayed to respondents. As a result, an
online survey was conducted, ensuring that all brands were
correctly displayed. Unfortunately, a major disadvantage of
online surveys is low response rates; this was countered by
offering respondents an incentive to participate.
Data collecon instrument
Because brand familiarity relates to individuals’ ability to
retrieve the brand from memory when given a cue, corporate
brand familiarly was assessed two-fold. Respondents were
given seven corporate brands and asked to indicate on a
5-point semantic differential scale whether they will buy a
specific company’s shares (1 = will definitely not buy shares
and 5 = will definitely buy shares). Demographic questions
such as age and gender, as well as attitudinal questions on
past investment behaviour and attitude towards investment,
were also included in the data collection instrument.
The reliability of the data was tested by means of the split-
half method, using a single questionnaire item to test the
reliability. In this case, respondents’ willingness to invest a
portion of R10 000 in the share market was used. The data
pertaining to this questionnaire item were split by separating
the data according to the participants’ response numbers.
Those participants who submitted their questionnaires first,
third, fifth, etc., were grouped and those who submitted
the questionnaires second, fourth, sixth, etc., were grouped.

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The two halves were compared to each other by means
of a correlation analysis; according to Coldwell & Herbst
(2004:17), the greater the degree of the correlation between
the two halves, the greater the reliability of the scale is
considered to be. The result of the split-half reliability test is
presented in Table 2.
The results in Table 2 suggest that there is a moderately
significant relationship between the two halves of the data
(r = 0.34). Thus, one can conclude that the scale is reliable
(Coldwell & Herbst 2004).
The sample
A convenience sample of students studying a variety of
different B.Com. subjects and courses at one university
participated in the study. As little research has been conducted
in South Africa on the likelihood to invest, this article serves
as an exploratory research study in the field of behavioural
finance in South Africa, and using a student sample seemed
appropriate. Although the participants may not have been
actively involved in share investments, their exposure to a
number of subjects that cover investment theory should have
raised their awareness of the factors that should be considered
during the investment decision-making process. In other
words, by sampling these students, one would expect that
they would be sensitive to aspects that could influence
investment decisions. A total of 500 students participated in
the study. Preliminary investigation indicated that, on
average, the questionnaire took about 6 minutes to complete
(s = 52 seconds). Therefore, to ensure that results gained were
valid, all questionnaires that were completed in less than
3 minutes were discarded. As a result, 439 completed, valid
observations could be used for data analysis purposes.
Results
The realised sample
The sample consisted of 53% male and 47% female
respondents. The average age of the respondents was 20 years
(s = 1.6; 17 ≤ x ≤ 30). The majority of the respondents were
B.Com. Management Studies students (56%) and 14% were
B.Com. Accounting students. The minority of the respondents
(23%) indicated that they have purchased shares in the past.
Even though only 23% of the respondents indicated that
they had bought shares in the past, preliminary data analysis
indicated that there were no significant differences in the
investment behaviour between respondents who had bought
shares in the past and those who had not (t(317) = 1.893;
p > 0.05). Those who had bought shares in the past spent,
on average, R32 233 on share purchases (s = R62 154; R200 ≤
x ≤ R500 000). Respondents were asked to indicate how much
(out of a total R10 000) they would be willing to invest in the
stock market in a month. On average, respondents indicated
that they will spend R1672 on stock market investments
(s = R1572; 0 ≤ x ≤ R10 000).
As previously mentioned, a secondary objective that was
formulated was to determine if individuals differentiate
TABLE 1: Familiar and unfamiliar corporate listed brands.
Familiar corporate listed brand Unfamiliar corporate listed brand
CORWILL
INVESTMENT
HOLDINGS
TABLE 2: Split-half reliability analysis.
Variable NCorrelaon Signicance
Uneven numbered 220 0.342 0.035*
Even numbered 219
*, Correlaon signicant at the 0.05 level.

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between companies’ listed corporate brands when deciding
on which companies to invest in. This objective has led to the
following hypothesis:
H1: There is a difference between individuals’ likelihood to investment
in familiar corporate brands versus unfamiliar corporate brands.
In order to test the postulated hypothesis, respondents
were requested to differentiate between various companies’
brands (i.e. images or ‘pictures’). Specifically, companies’
listed corporate brands were used. By conducting a one-way
analysis of variance (ANOVA), the null hypothesis was
rejected, indicating that there is a difference between
respondents’ likelihood to invest in companies with familiar
corporate brands compared to companies with unfamiliar
corporate brands (F(6) = 169.375; p < 0.000). The descriptive
statistics given in Table 3 show that respondents were
significantly more inclined to buy shares in the companies
with familiar brands (mean scores: SAB Miller = 3.99,
Truworths = 3.10, Pick n Pay = 3.69 and Foschini = 3.05)
than unfamiliar brands (mean scores: Austro = 2.27, Deep
Yellow = 2.26 and Corwill = 2.61). By rejecting the null
hypothesis, one can conclude that there is a significant
difference between respondents’ likelihood to invest in
companies with familiar corporate brands compared to
companies with unfamiliar corporate brands.
The second secondary objective was formulated to determine
if individuals differentiate between a subsidiary company
and its listed holding company’s corporate brand when
deciding on which company to invest in. This objective has
led to the following hypothesis:
H2: There is a difference between individuals’ likelihood to invest in
a subsidiary company compared to its listed holding company’s
corporate brand.
To substantiate the above finding of familiarity bias amongst
the sample of respondents, a further one-way ANOVA was
conducted. Six corporate brands were given and respondents
were asked to indicate on a 5-point semantic differential
scale whether they will buy a company’s shares; only
in this instance, three of the brands were those of
holding companies and the other three brands were their
subsidiaries. However, five holding and five subsidiaries
were initially selected based on the pilot study in which a
set of three holding companies and their subsidiaries was
identified for the purposes of the research. These companies
and their subsidiaries are illustrated in Table 4.
By conducting a one-way ANOVA on the set of holding
companies and their subsidiaries, further empirical evidence
is provided, which indicates that there is a difference between
brand familiarity and individuals’ investment decision
making with regards to holding and subsidiary companies
(F(5) = 86.926; p < 0.000). The descriptive results given in
Table 5 show that respondents were significantly more
inclined to buy shares in the companies with familiar
TABLE 3: Descripve stascs: Familiar versus unfamiliar corporate brands.
Variables NMinimum Maximum Mean Standard deviaon
Unfamiliar
Austro 439 1 5 2.27 0.91
Deep Yellow 439 1 5 2.26 0.96
Corwill 439 1 5 2.61 1.15
Familiar
SAB Miller 439 1 5 3.99 1.02
Truworths 439 1 5 3.10 1.14
Pick n Pay 439 1 5 3.69 1.12
Foschini 439 1 5 3.05 1.18
TABLE 4: Corporate listed brands of holding companies and their subsidiaries.
Subsidiary corporate brand Holding company corporate brand

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corporate brands (mean scores: JD Group = 3.44, Incredible
Connection = 3.10 and Country Fair = 3.22) than unfamiliar
corporate brands (mean scores: Sasko = 2.09, Pioneer = 2.54
and Astral = 2.64). From the results of the one-way ANOVA,
one can conclude that there is a significant difference between
respondents’ likelihood to invest in companies with familiar
brands compared to companies with unfamiliar brands, even
though the one company is the holding company and the
other is its subsidiary.
Conclusion and recommendaons
The results showed that respondents’ likelihood to invest in
companies with familiar corporate brands is higher than
their likelihood to invest in companies with unfamiliar
corporate brands. The results also showed that, not only are
respondents’ likelihood to invest in companies with familiar
brands higher than their likelihood to invest in companies
with unfamiliar brands but also they would rather invest in a
company they know than a company they are not familiar
with, even if the familiar company forms part of the
unfamiliar company (namely, a subsidiary and its holding
company). The notion that investment decision making
could be influenced by corporate brand familiarity is thus
supported. The findings from this study correspond with the
findings from various other authors such as Frieder and
Subrahmanyam (2005), Aspara and Tikkanen (2011) and
Aspara (2013). These studies conclude that investors are
more likely to invest in the stocks of companies they are
familiar with. Aspara and Tikkanen (2011:1446) found that
‘an individual’s identification with a company has a positive
effect on their determination to invest in the company’s
shares rather than in other companies’ shares that have
approximately similar expected financial return/risks’.
In marketing literature, it is often proposed that consumers’
buying decisions are influence by brand familiarly, in that
consumers would rather buy a product that is vaguely
familiar than a product that is not familiar at all (Hoyer &
Brown 1990; Macdonald & Sharp 2003). According to Inman
and McAlister (1994:423), ‘when choosing between an
unfamiliar brand and a familiar brand, a consumer might
consider the regret of finding that the unfamiliar brand
performs more poorly than the familiar brand and thus be
less likely to select the unfamiliar brand’. This notion is
substantiated by the results of The Nielsen Global Survey
of New Product sentiment that was conducted in 2012
(Nielsen.com 2013). It reports that 60% of global consumers
with Internet access prefer to buy new products from a
familiar brand rather than switch to a new brand. It
would seem that the same argument could be made about
investors’ investment decisions. According to Frieder and
Subrahmanyam (2005), the retail investor bases are greater
for companies with more familiar brands. Aspara and
Tikkanen (2011:1459) support this argument by reporting
that individuals who identify with a company are more likely
and willing to invest in the stock of that company compared
to others.
Therefore, one could argue that if companies succeed in
building strong brands that are familiar not only to
consumers but also to investors, these companies could
enjoy the added benefit of attracting potential investors
based on their familiarity with the brand. According to
Aspara and Tikkanen (2011:1459), this implication can help
when it comes to the marketing of a company in the
financial market, because individuals who identify with
the company are potential targets when the company seeks
to broaden its shareholder base.
However, management should be aware of the potentially
distorting impact that familiarity bias could have on
the efficient allocation of capital. In an efficient market
(characterised by rational investors devoid of biased decision
making), capital should flow towards companies that are
able to generate an acceptable level of return. Familiarity bias
could hinder this process by artificially lowering familiar
companies’ cost of capital, resulting in the inappropriate
appraisal of investment opportunities’ financial feasibility.
The resulting suboptimal investment of capital will fail to
generate sufficient returns, limiting the companies’ ability to
create value, and may ultimately compromise their long-
term sustainability.
Investors should also be aware that the irrational investment
behaviour that stems from familiarity bias could result in
the mispricing of familiar companies relative to unfamiliar
companies. Although greater demand for the shares of
companies with familiar corporate brands by irrational
investors would contribute to an increase in share prices,
it would also result in the overvaluation of these shares.
The price increases stemming from familiarity bias will only
be sustainable if the familiar companies are able to deliver
adequate financial performance to support the higher share
prices. If a familiar company fails to deliver acceptable
levels of financial performance, its share price would
TABLE 5: Descripve stascs: Holding company versus subsidiary company.
Variables NMinimum Maximum Mean Standard deviaon
Holding companies
Pioneera439 1 5 2.54 1.04
JD groupb439 1 5 3.44 1.20
Astralc439 1 5 2.64 1.11
Subsidiary companies
Saskoa439 1 5 2.09 0.91
Incredible conneconb439 1 5 3.10 1.23
Country fairc439 1 5 3.22 1.29
Note: a, b, c, denote holding and subsidiary company combinaons.

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eventually readjust to a lower level. If investors are able to
identify examples of severe mispricing caused by familiarity
bias, they could benefit from the resulting arbitrage
opportunities.
According to Buffet (2012), one needs to maintain emotional
detachment if one wants to be a successful investor. This
world-renowned investor warns investors to succumb to the
investment mistake, which he refers to as the ‘The Peter
Lynch bias’. According to Buffet, ‘investing in what you
know’ can cause you to lose perspective and see only what
you want to see in the stock (Sizemore 2012). If you like a
company, it does not necessarily mean that it is a good
investment and will deliver good returns on your investment.
This behaviour can result in investors holding suboptimal
portfolios, which may result in poor and often even negative
investment returns.
The results of this exploratory study point towards investors
exhibiting familiarity bias when choosing between different
companies (brands) to invest in. Although a familiar
corporate brand could be used to unlock access to investor
capital, it would also open the door to unforgiving public
scrutiny by financial market participants. Only those
companies with the ability to deliver healthy financial
performance by satisfying the needs of their customers
would contribute towards sustainable value creation.
It is evident that the behaviour exhibited by individual
investors can have implications for the marketing industry,
financial markets, company performance as well as the
investment performance of individual investors. Extensive
further research is needed on the behaviour of individual
investors in order to obtain a better understanding of their
investment decision-making process and to what extent it
could impact the various role players in the market.
Limitaons and suggesons for future research
Preliminary data analysis on the realised sample indicated
that there was no difference in the investment behaviour of
respondents who had invested in the past and those who had
not. It would seem that relatively inexperienced and first-
time investors may be at risk to be influenced by aspects such
as brand familiarity to an even greater degree than more
experienced investors when making investment decisions. In
future research, this study can be replicated by distributing
the questionnaire to investors who have a few years of
investing experience. An experiment amongst experienced
investors could also be conducted to assess the influence
brand familiarity has on their investment decision making.
In future, this study can also be extended by investigating the
characteristics of familiar companies and to link familiarity
with financial performance to identify potential arbitrage
opportunities. Researchers may also attempt to identify the
predominant factors that induce investors to feel familiar
with a company. Another aspect that could impact on a
company’s familiarity amongst investors is rebranding or
renaming the company. Familiarity bias stems from investors’
preferences to invest in companies they know. Rebranding or
renaming a company could influence investors to feel less
comfortable with investing in the company because of their
unfamiliarity with the new brand/name.
Acknowledgements
Compeng interests
The authors declare that they have no financial or personal
relationships which may have inappropriately influenced
them in writing this article.
Authors’ contribuons
All three authors contributed equally to the research and
writing of this article.
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