When choosing where to invest, it’s really easy to pick something because it’s familiar, even though that could be the wrong reason to invest, according to research from Vanderbilt University business professors.
“Everyday investors can often become overly attached to a particular stock or mutual fund, sometimes to their financial detriment,” said Steven Posavac, a marketing professor at the university, in a statement about the research. “We wanted to understand how internal factors such as top-of-mind awareness or external cues such as media attention can cause investors to become prematurely infatuated with a particular investment.”
Posavac and Nicolas Bollen, a finance professor, conducted three experiments in which they told participants to focus more on one investment choice than on three alternatives.
In the first, participants were given summaries of four similar mutual funds, assigned to rate one of them, and then asked to pick one of them to invest in. The participants were much more likely to invest in the fund they were assigned to rate than any of the other three. The researchers said that meant people could be subtly led to favor one of the investment options just because it was more noticeable than the others.
The other experiments showed that bias toward the more noticeable option is especially likely to occur when investors focus on it, and fail to consider other possibly better, alternatives, and that the phenomenon could lead to people choosing investments that are worse.
“We found that the infatuation effect persisted clearly across all three experiments, even when the salient option was worse than the others,” said Bollen. “Surprisingly, the effect was even a little bit stronger for those who indicated that they understood how investments worked.”
“Premature infatuation and commitment in individual investing decisions” ss published in the Journal of Economic Psychology.