07 July 2022, at 11.00 • Marco Biagi Foundation
SIVAN RIFF, Ruppin Acaedmic Center
CARLO ALBERTO MAGNI, Economics Department Marco Biagi, University of Modena and Reggio Emilia
Although international portfolio theory states that an optimal portfolio should be well diversified, in practice, investors tend to invest excessively in domestic assets. This tendency, commonly called home bias in the finance literature, has puzzled economists for many decades.
Studies that attempt to resolve the home bias problem primarily focus on economic barriers such as asymmetric information, transaction costs, taxes, and governance restrictions. However, in the recent years, the economic barriers to international diversification have been reduced drastically, suggesting that other explanations for this phenomenon may stem from behavioral factors. In addition to the home bias phenomenon (the geographic factor), this study investigates two other interrelated factors, familiarity and fluency. Familiarity refers to the extent of which an investor feels acquainted with an asset. Fluency refers to the extent of which the name is easy to comprehend.
Employing an experimental method for a sample of Israeli students, I find a support for the home bias phenomenon, and that it increases in the presence of negative shocks. In addition, I find that both familiarity and fluency play an important role in the context of investment decisions, and they can serve as additional explanations for the home bias phenomenon.
The seminar can be followed in precense or live through Microsoft Teams using the link: Behavioral Factors