Home bias
Investors pile into their own country's stocks and skip the diversification benefits abroad.
What it means
The tendency to hold a portfolio heavily concentrated in domestic assets, far beyond what optimal international diversification would prescribe. Standard theory says investors should hold the global market portfolio, yet they over-weight home markets, forgoing risk reduction. Explanations blend rational frictions (taxes, information costs, currency risk) with behavioral ones: familiarity, the comfort of the known, ambiguity aversion toward foreign markets, and over-optimism about the home economy. It matters because home bias leaves households under-diversified and more exposed to local downturns precisely when their human capital is too.
Examples
An investor in a small country holds almost entirely local shares, even though that market is a sliver of the world economy.
A worker's pension sits almost entirely in domestic funds while her salary, house and job depend on that same economy — one recession hits her savings and her income together.
Fund managers load up on firms headquartered near their own offices, mistaking the comfort of a familiar name and a local newspaper for genuine information about the shares.
First described in French & Poterba (1991).
Where this comes up
- Feed the Self, Not Just the Shelf: The ROI of HappinessIn finance, we are trained to begin with a deceptively simple question before committing capital: What’s the return on…