A central problem in the analysis of genetic field trials is the dichotomy of "genetic" and "environmental" effects because one cannot be defined without the other. Results from 768,000 simulated family trials in complete randomized block designs demonstrated a serious upward bias in estimates of family variance components from multi-unit plot designs when the phenotypic observations were compatible with a first-order autoregressive (AR1) process. The inflation of family variances and, thus, additive genetic variance and narrow sense individual heritabilities progressed exponentially with an increase in the nearest neighbor correlation (ฯฑ) in the AR1 process. Significant differences in inflation rates persisted among various plot configurations. At ฯฑ = 0.2 the inflation of family variances reached 48-73%. Inflation rates were independent of the level of heritability. Modified Papadakis nearest neighbor (NN) adjustment procedures were tested for their ability to remove the bias in family variances. A NN-adjustment based on Mead's coefficient of interplant interaction and one derived from Bartlett's simultaneous autoregressive scheme removed up to 97% of the bias introduced by the phenotypic correlations. NN-adjusted estimates had slightly (5-8%) higher relative errors than did unadjusted estimates.