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The Equity Home Bias: Contrasting An Institutional With A Behavioral Explanation

Author

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  • Gerlinde Fellner
  • Boris Maciejovsky

Abstract

An empirically well-established finding is that equity portfolios are concentrated in the domestic equity market of the investor. Previous theoretical and empirical analyses have mainly focused on institutional explanations and largely neglected individual behavior. In this study we report the results of an experiment in which we contrast institutional with behavioral explanations by comparing asymmetric information to social identity. Our results show that social forces, triggered by group a_liation, drive underdiversified and domestically biased portfolio allocations. Moreover, social identity explains the observed behavior equally well as asymmetric information. We also find that individuals are spuriously more optimistic toward the performance of domestic firms.

Suggested Citation

  • Gerlinde Fellner & Boris Maciejovsky, "undated". "The Equity Home Bias: Contrasting An Institutional With A Behavioral Explanation," Papers on Strategic Interaction 2003-03, Max Planck Institute of Economics, Strategic Interaction Group.
    • Handle: RePEc:esi:discus:2003-03
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    File URL: ftp://papers.econ.mpg.de/esi/discussionpapers/2003-03.pdf
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    Citations

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    Cited by:

    1. Carey K. Morewedge & Simone Tang & Richard P. Larrick, 2018. "Betting Your Favorite to Win: Costly Reluctance to Hedge Desired Outcomes," Management Science, INFORMS, vol. 64(3), pages 997-1014, March.
    2. Bose, Udichibarna & MacDonald, Ronald & Tsoukas, Serafeim, 2015. "Education and the local equity bias around the world," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 39(C), pages 65-88.
    3. Mariana Blanco & Dirk Engelmann & Alexander Koch & Hans-Theo Normann, 2010. "Belief elicitation in experiments: is there a hedging problem?," Experimental Economics, Springer;Economic Science Association, vol. 13(4), pages 412-438, December.
    4. Hisham S. Foad, 2012. "Equity Home Bias and the Euro," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 2(01), pages 1-29.
    5. Syed Aliya Zahera & Rohit Bansal, 2018. "Do investors exhibit behavioral biases in investment decision making? A systematic review," Qualitative Research in Financial Markets, Emerald Group Publishing Limited, vol. 10(2), pages 210-251, May.

    More about this item

    Keywords

    investment decisions; behavioral finance; experimental economics; international economics; behavioral decision making;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • F30 - International Economics - - International Finance - - - General
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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