Familiarity Bias Thwarting Wall Street Employees, Are You Next?

What is your exposure?

Businessweek recently ran an article exposing $2 billion in losses last year among employees of the five largest Wall Street banks-JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs, and Morgan Stanley.  The losses were attributable to company stock, in many cases the employee’s largest holding within their 401k plans.

With the recent Occupy Wall Street movement and anger towards the 1%, you may not feel much sympathy for Wall Street employees.  However, this predicament is not unique to employees of financial companies and highlights the danger of a familiarity bias.  This bias is similar to the “home team bias” in sports and leads to buying companies that you know or have a certain loyalty to.  Working for a company for many years may even breed an emotional attachment to the stock position.  This is understandable as career success may have been tied to growth of the company.

The article cites Morgan Stanley’s practice of matching 401k contributions with shares of company stock as one of the ways employee accounts become over weighted in employer stock.  This is just one example of how employee’s portfolios can accumulate a large percentage in company stock.  Several years’ worth of Employee Stock Purchase Plan contributions, Stock Options, Restricted Stock Units, a 401k position all coupled with company growth can lead to an over-allocation in an individual stock.  These positions also tend to be scattered among multiple accounts.

Unfortunately, many investors don’t even realize that they are exposing themselves to so much risk.  Unless you consistently review your investment accounts, you may not know what percentage you have allocated to company stock.  Applying a diversified investment strategy over the long term and periodically reviewing your portfolio reduces the likelihood of suffering the consequences of a familiarity bias.


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