East or West, Home Is Best: The Birthplace Bias of Individual Investors

Abstract

We introduce the concept of “birthplace bias” to examine the extent to which individual investors’ local bias is explained by their place of birth. In addition, we conduct a counterfactual analysis in order to compare their biases before and after they move to a new place. We find that the place of birth is an important determinant in the portfolio choice of the average individual investor in particularly urban areas. We also find that individual investors who move back to their birthplace (home-comers) tend to increase their local bias over time more than other movers. While diversification is profitable regardless of portfolio distortion, the less diversified individual investors do on average neither gain nor lose relative to the market from being birthplace and/or locally biased. This implies rationality; individual investors seem to choose proximate stocks whenever they face equal or nearly equal costs just out of pure “indisputable preferences.”

Keywords: Portfolio choice, Birthplace bias, Local bias, Counterfactual bias, Information asymmetry, Familiarity, Indisputable preferences

JEL Classification: G11, G14, G15