Behavioral Biases in Action

After laying out various biases in previous toolsets, we now look at how they effect people/firms.

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    Home Bias at Home: Local Equity Preference in Domestic Portfolios

    Stay at home investing

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    Strong and XU: Understanding Home country Bias

    Abstract: "This study uses survey data of fund managers' views on prospects for international equity markets to shed light on why investment portfolios are significantly biased towards domestic equities. We find that fund managers from the United States, the United Kingdom, continental Europe, and Japan show a significant relative optimism towards their home equity market. Where institutional factors have largely failed to explain the puzzle, our evidence lends support to behavioral explanations of the bias."

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    A rational explanation for home country bias

    Maybe it is not as much of a bias as we thought?? "While modern portfolio theory predicts that investors should diversify across international markets, corporate equity is essentially held by domestic investors. French and Poterba (1991) [French, K., Poterba, J., 1991. Investor diversification and international equity markets."

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    Home Bias is sometimes even closer to home

    Not just in your country, but in your neighborhood

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    Multinational Finance

    maybe it is we measure benefits of diversification incorrectly? In bad times correlations increase.

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    Excessive Extrapolation and the Allocation of 401(k) Accounts to Company Stock - Benartzi - 2002 - The Journal of Finance - Wiley Online Library

    investor/employees invest more in their own company's stock if the stock has done well in past. Alas, it stops doing well.

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    Hot Hands in Mutual Funds: Short-Run Persistence of Relative Performance, 1974-1988

    The debate on hot hands in mutual funds

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    CArhart on the persistance of Mutual Fund Performance

    The seminal article on hot hand persistance (or lack thereof)

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    a look at more studies

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