What is 'Home Bias'

Home bias is the tendency for investors to invest in a large amount of domestic equities, despite the purported benefits of diversifying into foreign equities. This bias is believed to have arisen as a result of the extra difficulties associated with investing in foreign equities, such as legal restrictions and additional transaction costs.

BREAKING DOWN 'Home Bias'

Investing in foreign equities tends to lower the amount of systematic risk in a portfolio because foreign investments are less likely to be affected by domestic market changes.

However, investors from all over the world tend to be biased toward investing in domestic equities. For example, an academic study from the late 1980s showed that although Sweden possessed a capitalization that only represented about 1% of the world's market value of equities, Swedish investors put their money almost exclusively into domestic investments.

RELATED TERMS
  1. Bias

    Biases are human tendencies that lead us to follow a particular ...
  2. Home Country Bias

    Investors' natural tendency to be most attracted to investments ...
  3. Sample Selection Bias

    A type of bias caused by choosing non-random data for statistical ...
  4. Dedicated Short Bias

    A hedge fund strategy that maintains a net short exposure to ...
  5. Instant History Bias

    An inaccuracy in the appearance of investment fund returns that ...
  6. Outcome Bias

    A decision based on the outcome of previous events without regard ...
Related Articles
  1. Investing

    Behavioral Bias - Cognitive Vs. Emotional Bias In Investing

    We all have biases. The key to better investing is to identify those biases and create rules to minimize their effect.
  2. Financial Advisor

    8 Common Biases That Impact Investment Decisions

    Behavioral biases hit us all as investors and can vary depending upon our investor personality type.
  3. Investing

    Effects Of Behavioral Biases In Investing Decisions

    Investing, just like our day to day activities, is primarily driven by our behavioral patterns and general thought processes.
  4. Financial Advisor

    Behavioral Finance Tips for Advising Your Clients

    Here's how advisors can prevent clients from making irrational investment decisions.
  5. Investing

    Top Reasons Stock Indices Could Be Biased

    Do the owners of the large stock indices (McGraw Hill Financial, CME Group, and News Corp) have incentive to pick stocks to put in the index that are "shiny" as a marketing ploy? And if so, wouldn't ...
  6. Investing

    5 Mental Mistakes That Affect Stock Analysts

    They know more about stocks than the average person, but analysts are still affected by biases. Find out what they are.
  7. Investing

    4 Biases That Can Make You A Bad Investor

    Find out how to spot these four biases, and start making more logical investing decisions.
  8. Financial Advisor

    Behavioral Finance: How Bias Can Hurt Investing

    Here are three cognitive biases from behavioral finance that investors would do well to be aware of to avoid making poor investment decisions.
  9. Investing

    Published Mutual Fund Returns Not Always What They Appear

    Survivorship bias erases substandard performers, distorting overall mutual fund returns.
RELATED FAQS
  1. What are some examples of a Foreign Institutional Investor (FII)?

    Discover some examples of foreign institutional investors, and learn information about the nature of foreign institutional ... Read Answer >>
  2. Why are private equity investments usually reserved for rich people?

    Learn what investors without a high net worth can do to invest in private equity investments, and discover the benefits and ... Read Answer >>
  3. How does the risk profile of private equity investments compare to those of other ...

    Learn how the risk profile of private equity investment compares to other asset classes and the aspects investors should ... Read Answer >>
  4. What are the differences between debt and equity markets?

    Understand the basic, fundamental differences between the two primary investment markets of debt securities and equity investments. Read Answer >>
  5. What is the difference between market capitalization and equity?

    Understand the difference between market capitalization and equity, two primary measurements used to evaluate the worth of ... Read Answer >>
Hot Definitions
  1. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
  2. Money Market

    A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. ...
  3. Block (Bitcoin Block)

    Blocks are files where data pertaining to the Bitcoin network is permanently recorded.
  4. Fintech

    Fintech is a portmanteau of financial technology that describes an emerging financial services sector in the 21st century.
  5. Ex-Dividend

    A classification of trading shares when a declared dividend belongs to the seller rather than the buyer. A stock will be ...
  6. Debt Security

    Any debt instrument that can be bought or sold between two parties and has basic terms defined, such as notional amount (amount ...
Trading Center