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

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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.

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Bibliographic Info

Paper provided by Max Planck Institute of Economics, Strategic Interaction Group in its series Papers on Strategic Interaction with number 2003-03.

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Length: 34 pages
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Handle: RePEc:esi:discus:2003-03

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Keywords: investment decisions; behavioral finance; experimental economics; international economics; behavioral decision making;

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Cited by:
  1. Blanco, Mariana & Engelmann, Dirk & Koch, Alexander K. & Normann, Hans-Theo, 2008. "Belief Elicitation in Experiments: Is there a Hedging Problem?," IZA Discussion Papers 3517, Institute for the Study of Labor (IZA).

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