Behavioral determinants of home bias - theory and experiment
We study portfolio diversification in an experimental decision task, where asset returns depend on a draw from an ambiguous urn. Holding other information identical and controlling for the level of ambiguity, we find that labeling assets as being familiar or from the homeland of subjects increases portfolio weights by around 25%, respectively; although the return-generating process remains unaffected. Importantly, we only find these effects when the returns of assets are highly ambiguous. Our ambiguity robust mean-variance model accurately predicts benchmark portfolio weights of the experimental control group, where assets are not labeled: subjects allocate more wealth to assets with low ambiguity. For treatment group portfolios, which show a bias towards assets with a familiar or homeland label, the model does not hold. This misdiversification against the benchmark portfolio can be rationalized via the concept of source dependence of uncertainty attitudes.
|Date of creation:||Apr 2014|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.uibk.ac.at/fakultaeten/volkswirtschaft_und_statistik/index.html.en
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Chew, Soo Hong & Sagi, Jacob S., 2008. "Small worlds: Modeling attitudes toward sources of uncertainty," Journal of Economic Theory, Elsevier, vol. 139(1), pages 1-24, March.
- Peter Klibanoff & Massimo Marinacci & Sujoy Mukerji, 2005.
"A Smooth Model of Decision Making under Ambiguity,"
Econometric Society, vol. 73(6), pages 1849-1892, November.
- Sujoy Mukerji & Peter Klibanoff, 2002. "A Smooth Model of Decision,Making Under Ambiguity," Economics Series Working Papers 113, University of Oxford, Department of Economics.
- Peter Klibanoff & Massimo Marinacci & Sujoy Mukerji, 2002. "A smooth model of decision making under ambiguity," ICER Working Papers - Applied Mathematics Series 11-2003, ICER - International Centre for Economic Research, revised Apr 2003.
- Fabio Maccheroni & Massimo Marinacci & Doriana Ruffino, 2010.
"Alpha as Ambiguity: Robust Mean-Variance Portfolio Analysis,"
373, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- Fabio Maccheroni & Massimo Marinacci & Doriana Ruffino, 2013. "Alpha as Ambiguity: Robust Mean‐Variance Portfolio Analysis," Econometrica, Econometric Society, vol. 81(3), pages 1075-1113, 05.
- French, Kenneth R & Poterba, James M, 1991.
"Investor Diversification and International Equity Markets,"
American Economic Review,
American Economic Association, vol. 81(2), pages 222-26, May.
- Kenneth R. French & James M. Poterba, 1991. "Investor Diversification and International Equity Markets," NBER Working Papers 3609, National Bureau of Economic Research, Inc.
- De Santis, Giorgio & Gerard, Bruno, 1997. " International Asset Pricing and Portfolio Diversification with Time-Varying Risk," Journal of Finance, American Finance Association, vol. 52(5), pages 1881-1912, December.
- Hirshleifer, David, 2001.
"Investor Psychology and Asset Pricing,"
5300, University Library of Munich, Germany.
- Halevy, Yoram, 2005.
"Ellsberg Revisited: an Experimental Study,"
Microeconomics.ca working papers
halevy-05-07-26-11-51-13, Vancouver School of Economics, revised 25 Feb 2014.
- Morse, Adair & Shive, Sophie, 2011. "Patriotism in your portfolio," Journal of Financial Markets, Elsevier, vol. 14(2), pages 411-440, May.
- Epstein, Larry G. & Miao, Jianjun, 2003.
"A two-person dynamic equilibrium under ambiguity,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 27(7), pages 1253-1288, May.
- Lucy F. Ackert & Bryan K. Church & James Tompkins & Ping Zhang, 2003.
"What's in a name? An experimental examination of investment behavior,"
2003-12, Federal Reserve Bank of Atlanta.
- Lucy Ackert & Bryan Church & James Tompkins & Ping Zhang, 2005. "What’s in a Name? An Experimental Examination of Investment Behavior," Review of Finance, Springer, vol. 9(2), pages 281-304, 06.
- Stijn Van Nieuwerburgh & Laura Veldkamp, 2007.
"Information Immobility and the Home Bias Puzzle,"
NBER Working Papers
13366, National Bureau of Economic Research, Inc.
- Laura Veldkamp & Stijn Van Nieuwerburgh, 2005. "Information Immobility and the Home Bias Puzzle," 2005 Meeting Papers 78, Society for Economic Dynamics.
- Laura Veldkamp & Stijn Van Nieuwerburgh, 2004. "Information Immobility and the Home Bias Puzzle," Working Papers 04-32, New York University, Leonard N. Stern School of Business, Department of Economics.
- Joshua D. Coval & Tobias J. Moskowitz, 1999. "Home Bias at Home: Local Equity Preference in Domestic Portfolios," Journal of Finance, American Finance Association, vol. 54(6), pages 2045-2073, December.
- Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
- Kumar, Alok, 2009. "Hard-to-Value Stocks, Behavioral Biases, and Informed Trading," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(06), pages 1375-1401, December.
- Kalok Chan & Vicentiu Covrig & Lilian Ng, 2005. "What Determines the Domestic Bias and Foreign Bias? Evidence from Mutual Fund Equity Allocations Worldwide," Journal of Finance, American Finance Association, vol. 60(3), pages 1495-1534, 06.
- Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
- Tesar, Linda L. & Werner, Ingrid M., 1995. "Home bias and high turnover," Journal of International Money and Finance, Elsevier, vol. 14(4), pages 467-492, August.
- Fox, Craig R & Tversky, Amos, 1995. "Ambiguity Aversion and Comparative Ignorance," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 585-603, August.
- Mohammed Abdellaoui & Aurelien Baillon & Laetitia Placido & Peter P. Wakker, 2011. "The Rich Domain of Uncertainty: Source Functions and Their Experimental Implementation," American Economic Review, American Economic Association, vol. 101(2), pages 695-723, April.
- Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
When requesting a correction, please mention this item's handle: RePEc:inn:wpaper:2014-11. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Janette Walde)
If references are entirely missing, you can add them using this form.