The home bias and the local bias: A survey

Abstract

The home bias like the disposition effect is a well-researched economic phenomenon in investor behaviour which has been examined in finance journal articles for decades. While there is little doubt about the existence of the bias, its magnitude varies across countries and investor groups. The home bias has to be regarded as a multifactorial phenomenon, a combination of numerous causes which all synergistically contribute. In contrast to other biases the home bias can at least partially be explained by reasons beyond irrational investor behaviour. While institutional restrictions play a minor role, informational asymmetries and superior information of domestic investors are important factors. Thus, the performance of investments may well benefit from a home bias, and the bias then no longer would be a puzzle but rather rational behaviour as a lower diversification level may lead to higher returns. The contemporary understanding of the home bias gains in relevance as the ongoing political debate in Germany has to clarify an institutional framework for long-run retirement savings plans of private households based on equity investments.