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Cross-country differences in personality and the foreign bias in international equity portfolios

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  • Paweł Niszczota

Abstract

In this study, we investigate whether cross-country variation in investors' mean openness to experience - one of the traits of the Five-Factor Model of personality - has an effect on the level of foreign bias present in international equity portfolios. Building on extant research showing a strong relationship between openness to experience and the attitude towards other cultures and risk, we argue that this personality trait is a construct that aggregates aspects of the psyche that influence the propensity to invest abroad. We find support for this hypothesis, showing that the more 'open' the country, the smaller the underrepresentation of foreign assets in its equity portfolio. Our analysis reveals that the impact of openness to experience is the most pronounced while making investments in countries with a weak information environment, or those that culturally or economically differ from the country the investor comes from, and suggests that international asset allocation is to some extent affected by psychological biases.

Suggested Citation

  • Paweł Niszczota, 2014. "Cross-country differences in personality and the foreign bias in international equity portfolios," The European Journal of Finance, Taylor & Francis Journals, vol. 20(10), pages 934-956, October.
    • Handle: RePEc:taf:eurjfi:v:20:y:2014:i:10:p:934-956
    DOI: 10.1080/1351847X.2013.856332
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    Cited by:

    1. Sangita Choudhary & Mohit Yadav & Anugamini Priya Srivastava, 2024. "Cognitive Biases Among Millennial Indian Investors: Do Personality and Demographic Factors Matter?," FIIB Business Review, , vol. 13(1), pages 106-117, January.
    2. Kwabi, Frank O. & Boateng, Agyenim & Du, Min, 2020. "Impact of central bank independence and transparency on international equity portfolio allocation: A cross-country analysis," International Review of Financial Analysis, Elsevier, vol. 69(C).
    3. Drobetz, Wolfgang & Mönkemeyer, Marwin & Requejo, Ignacio & Schröder, Henning, 2023. "Foreign bias in institutional portfolio allocation: The role of social trust," Journal of Economic Behavior & Organization, Elsevier, vol. 214(C), pages 233-269.
    4. Yogita Singh & Mohd. Adil & S. M. Imamul Haque, 2023. "Personality traits and behaviour biases: the moderating role of risk-tolerance," Quality & Quantity: International Journal of Methodology, Springer, vol. 57(4), pages 3549-3573, August.

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