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Trust and local bias of individual investors

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  • Shao, Ran
  • Wang, Na

Abstract

We examine the effects of social trust on the local bias of individual investors. Using the trading records of Chinese retail investors, we find that investors with higher trust exhibit lower local bias in their stock portfolios, and this pattern holds under various robustness tests. We further show that trust helps accomplish greater portfolio diversification and reduces familiarity-based investment bias in general. These findings suggest that trust plays an important role in individual investors’ financial decisions, especially when they face unfamiliar investment opportunities.

Suggested Citation

  • Shao, Ran & Wang, Na, 2021. "Trust and local bias of individual investors," Journal of Banking & Finance, Elsevier, vol. 133(C).
    • Handle: RePEc:eee:jbfina:v:133:y:2021:i:c:s0378426621002296
    DOI: 10.1016/j.jbankfin.2021.106273
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    More about this item

    Keywords

    Trust; Local bias; Individual investors; Portfolio concentration; Information advantage; Familiarity bias;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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