WHY IS THERE A HOME BIAS? COUNT THE TEETH!

Jitka Hilliard and Jimmy E. Hilliard

Under somewhat idealized conditions, investors would achieve the best risk return tradeoff by allocating equity investment in each country equal to its percentage share of world equity capitalization. But factual evidence confirms that domestic investors prefer domestic stocks. For example, domestic investors allocate about 90 percent of their portfolios to domestic equity even though US equity accounts for only about 50 percent of world equity. This amounts to placing a 40 percent side bet on US equity. This is referred to as the home bias. Why does it exist? Many reasons have been given including lack of transparency, asymmetric information, investor protection, and transaction costs. This article recounts the experience and associated transactions cost of a US investor in Prague who attempts to buy individual stocks on the local market.