Abstract
This chapter discusses the implications of proximity bias for investor welfare, market prices, firm-level cost of capital, and the market developments. We focus on the economic cost of proximity bias. We also discuss and analyze the implications of proximity bias on international markets. The diversification argument suggests that the relevant portfolio over which investors should diversify is the global market. We analyze the implications of domestic proximity bias on international portfolios and discuss the reasons for deviation from global diversification. This chapter concludes with a discussion of the key attributes of proximity-biased portfolios and some advice that students, investors, portfolio managers, and regulators should have a clear view of the determination and implications of proximity-biased portfolios on asset prices and investor welfare. This chapter also provides some suggestions for future research.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
References
Addoum, J.M. 2016. Household portfolio choice and retirement, Working paper, Cornell University.
Aggarwal, R., I. Erel, R.M. Stulz, and R. Williamson. 2009. Differences in Governance Practices between U.S. and Foreign Firms: Measurement, Causes, and Consequences. Review of Financial Studies 29: 3131–3169.
Anderson. 2013. Trading and Under-diversification. Review of Finance 1–43.
Atkinson, J., A. de Janvry, C. Mcintosh, and E. Sadoulet. 2013. Prompting Microfinance Borrowers to Save: A Field Experiment from Guatemala. Economic Development and Cultural Change 62: 21–64.
Bhatt, V., and M. Ogaki. 2012. Tough Love and Intergenerational Altruism. International Economic Review 53: 791–814.
Black, F. 1986. Noise. Journal of Finance 41: 529–543.
Calvet, L.E., J.Y. Campbell, and P. Sodini. 2009. Fight or Flight? Portfolio Rebalancing by Individual Investors, Quarterly Journal of Economics 124: 301–348.
Campbell, J.Y. 2006. Household Finance. Journal of Finance 61: 1553–1604.
Demarzo, P.M., R. Kaniel, and I. Kremer. 2004. Diversification as a Public Good: Community Effects in Portfolio Choice. Journal of Finance 59: 1677–1715.
Dijk, O., K. Erikson, S. Fest, and O. Kvaløy. 2016. Fair Advice. Nijmegen: Radboud University.
Fried, D., and D. Givoly. 1982. Financial analysts’ forecasts of earnings: A better surrogate for market expectations. The Journal of Accounting and Economics 4(2): 85–107.
Giannetti, M., and L. Laeven. 2016. Local Ownership, Crises, and Asset Prices: Evidence from US Mutual Funds. Review of Finance 20: 947–978.
Gibbons, A.M., J.A. Sniezek, and R.S. Dalal. 2003. Antecedents and Consequences of Unsolicited Versus Explicitly Solicited Advice. In D. Budescu (Chair), Symposium in Honor of Janet Sniezek. Symposium Presented at the Annual Meeting of the Society for Judgment and Decision Making. Vancouver, BC.
Gino, F. 2008. Do We Listen to Advice Just Because We Paid for It? The Impact of Cost of Advice on Its Use. Organizational Behavior and Human Decision Processes 107: 234–245.
Hong, H., J. Kubik, and J. Stein. 2008. The Only Game in Town: Stock-Price Consequences of Local Bias. Journal of Financial Economics 90: 20–37.
Jungermann, H., and K. Fischer. 2005. Using Expertise and Experience for Giving and Taking Advice. In The Routines of Decision Making, ed. T. Betsch, and S. Haberstroh, 157–173. Mahwah: Lawrence Erlbaum.
Kakkar, V., and E. Ruiz. 2016. Determinants of Financial Literacy: Evidence from Spain, Working paper. Spain: Universitat Oberta de Catalunya.
Keppo, J., T. Shumway, and D. Weagley. 2016. Can Individual Investors Time Bubbles? Working paper, Georgia Tech Scheller College of Business Research Paper No. 2015–12.
Lindblom, T., T. Mavruk, and S. Sjögren. 2016. East or West, Home is Best: The Birthplace Bias of Individual Investors. Journal of Banking and Finance, Forthcoming.
Lyon, J., B. Barber, and C. Tsai. 1999. Improved Methods of Tests of Long-horizon Abnormal Stock Returns. Journal of Finance 54: 165–201.
Malkiel, B. G. 2003. The Efficient Market Hypothesis and Its Critics. Journal of Economic Perspectives 17: 59–82.
Mehra, R., and R. Sah. 2002. Mood Fluctuations, Projection Bias and Volatility of Equity Prices. Journal of Economic Dynamics and Control 26: 869–887.
Merton, R.C. 1987. A Simple Model of Capital Market Equilibrium with Incomplete Information. Journal of Finance 42: 483–510.
Nofsinger, J.R. 2016. The Psychology of Investing. Pearson Series in Finance, 5th ed, USA.
Satagaj, R. 2016. Local Bias and the Predictability of Firms Master Thesis: Durham University.
Simon, H. 1957. A Behavioral Model of Rational Choice, in Models of Man, Social and Rational: Mathematical Essays on Rational Human Behavior in a Social Setting. New York: Wiley.
Sprenger, J. 2016. Naïve advice in financial decision making: Hidden costs of a free offer Working paper: Ruhr-Universität Bochum.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
Copyright information
© 2017 The Author(s)
About this chapter
Cite this chapter
Lindblom, T., Mavruk, T., Sjögren, S. (2017). Conclusions and Implications. In: Proximity Bias in Investors’ Portfolio Choice. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-54762-6_12
Download citation
DOI: https://doi.org/10.1007/978-3-319-54762-6_12
Published:
Publisher Name: Palgrave Macmillan, Cham
Print ISBN: 978-3-319-54761-9
Online ISBN: 978-3-319-54762-6
eBook Packages: Economics and FinanceEconomics and Finance (R0)