The Relation Between Local Bias, Home Bias, and Financial Sophistication

Abstract

This chapter offers some insight for determining the importance of geography effects in international portfolio choice relative to the domestic proximity bias. Relatively few studies have examined the relation between local bias and home bias of individual investors, let alone assessed the extent to which their local bias contributes to the international home bias puzzle. In this chapter, we add to these findings by extrapolating our results in Lindblom et al (2016), on individual investors’ proximity bias within Sweden, to the international scale by estimating the distance adjusted portfolio share of the Swedish individual investors on 82 countries. In a further attempt to add to our knowledge, we also identify the determinants of foreign bias and test the hypothesis that individual investors are likely to exhibit less foreign bias toward particularly countries in which financial sophistication is higher.