Behavioral Finance and Your Portfolio

22Emotional Bias #7: Affinity Bias

My yachts were, I suppose, outstanding status symbols.

—Paul Getty

Bias Description

Bias Name: Affinity bias

Bias Type: Emotional

General Description

Affinity bias refers to an individual's tendency to make irrationally uneconomical consumer choices or investment decisions based on how they believe a certain product or service will reflect their values. This idea focuses on the expressive benefits of a product rather than on what the product or service actually does for someone (the utilitarian benefits). A common example of this behavior in the consumer product realm is when one purchases wine. A consumer may purchase a fine bottle of well-known wine in a restaurant or wine shop for hundreds of dollars to impress their dinner guests, while a bottle that costs much less could be equally delicious but would not convey the same status. Automobiles are another example. A person may purchase a Range Rover or similar sport utility vehicle because they want to be viewed by others as someone who is “outdoorsy” (sometimes regardless of the extent to which the person actually engages in outdoor activities) when a much more affordable vehicle would easily transport them from point A to point B. Similarly, in the investment realm, individuals may invest in certain companies, such as those that produce Range Rovers, because they feel that this company reflects their values or self-image. This behavior may lead to sub-optimal investment results if ...