Cultural Influences on Financial Decisions
February 12, 2025
Contracts govern all transactions whether they are between firms or between firms and private individuals. Indeed, in most of the developed world, any transaction or commercial exchange is usually not undertaken without a contract. This trend is also catching up in the developing world where contracts are increasingly becoming the norm. The importance of contracts […]
Toys R Us is an iconic American company. According to recent surveys, Toys R Us has a market share of more than 15%. With this market share, the company should be in a commanding position in the toys market. However, ironically it is filing for Chapter 11 bankruptcy. This means that it is still likely […]
Now, since we are aware that there are actually multiple models that can be used to value any given company or asset, the next question that arises is which one should we use? How do we know whether a given valuation model is more appropriate for a given company than the others? The answer is […]
The price to earnings ratio is the most fundamental of all market related ratios. It has been used for decades by stalwarts in the investment community. However, it is also the ratio that has come under maximum fire from the skeptics. A variety of measurements have been developed to compensate for what skeptics call the […]
The entity concept separates the concerns of the owners from the business. An extension of the same concept is the concept of accounts which splits up the business’s affairs further. The account concept becomes clearer once the double entry system of accounting is explained. That is done at a later stage in the tutorial. Transactions […]
The activities of most investors have historically been limited to their home country. This is largely because earlier, there were rules which made the transfer of capital between countries an arduous process. Not only was the process complex, but it also took a lot of time and was riddled with transaction costs. This is the reason that over the years, investors have become accustomed to considering investment options only from their home country.
However, the reality is the investment world has undergone a sea of change in the past few years. Investors now have access to investment options from all across the globe. Also, the process is as inexpensive and hassle-free as local investments. Years of conditioning have created an investor psyche wherein they simply subconsciously omit investment options from other countries. In this article, we will have a look at this phenomenon as well as how it impacts the behavior of investors.
Simply put, home country bias is a tendency to place excessive emphasis on the investment options of one’s own country. Home country bias is mostly an emotional reaction as it helps investors feel safe if they invest in their own country. Some investors are simply indifferent to the existence of investment options in other countries. However, there are some others who acknowledge these options but then choose not to invest in them because of their behavioral biases. This is the reason that investors all over the world allocate more than two-thirds of their portfolio to investments from their home country. It is strange that this trend encompasses both developed as well as developing nations. Investors in developed nations are willing to forego growth, whereas the ones in developing nations are willing to forego security but prefer to invest in their respective countries.
Home country bias might seem innocuous at first. However, the reality is that it can have a devastating impact on the portfolio of many investors. The reasons for the same have been mentioned below:
Home country bias makes the investor myopic. Traditional economics assumes that investors would chase higher returns across national boundaries since they are rational. However, the reality is that many prefer to have sub-optimal gains since they simply overlook the investments available outside the home country.
A lot of investors have been able to overcome the home country bias with knowledge and help from their advisors. The advisors have explained to them that there are financial products that can be used to manage the risks. Financial investors often introduce investors to others who have put their hard-earned money in international markets and hence are reaping higher returns.
The fact of the matter is that the home country bias is an emotional response to investments. It can only be mitigated with a rational response. Since knowledge is the basis for also rational responses, it is the most effective tool in the fight against this bias.
Your email address will not be published. Required fields are marked *