Home Bias explained by familiarity, not ambiguity

Abstract

Using a trailing digit betting design in four experiments, we identify familiarity bias as an explanation for home bias that is distinct from ambiguity aversion or informational advantage. The first two studies establish the existence of a strong familiarity bias within an investment context. A third experiment establishes that standard home bias and familiarity bias are of comparable magnitudes. The last study further demonstrates that home bias can be explained, within subject, by familiarity bias but not by ambiguity aversion. The studies consistently point to familiarity bias as a driver of home bias across investment context and subject types.

Keywords: Source Preference, Familiarity Bias, Home Bias, Ambiguity Aversion, Investment

JEL Classification: D81, C91