THE EQUITY HOME BIAS: CONTRASTING AN INSTITUTIONAL WITH A BEHAVIORAL EXPLANATION

An empirically well-established finding is that equity portfolios are concentratedin the domestic equity market of the investor. Previous theoreticaland empirical analyses have mainly focused on institutional explanations andlargely neglected individual behavior. In this study we report the results of anexperiment in which we contrast institutional with behavioral explanationsby comparing asymmetric information to social identity. Our results showthat social forces, triggered by group affiliation, drive underdiversified anddomestically biased portfolio allocations. Moreover, social identity explainsthe observed behavior equally well as asymmetric information. We also findthat individuals are spuriously more optimistic toward the performance ofdomestic firms.