Behavioral Biases and Portfolio Choice
Posted: 26 Jul 2003
We investigate the way investors react to prior gains/losses and the so called "familiarity" bias. We use a new and unique dataset with detailed information on investors' various components of wealth, income, demographic characteristics and portfolio holdings identified at the stock level. We distinguish between different behavioral theories (loss aversion, house-money effect) and between behavioral and rational hypotheses (pure familiarity and information-based familiarity). We show that, on a yearly horizon, investors react to previous gains/losses according to the house-money effect. In terms of individual stock picking, we provide evidence in favor of the information-based theory and show that familiarity can be considered as a proxy for the availability of information as opposed to behavioral heuristics.
Keywords: Behavioral finance, portfolio investment, loss aversion, familiarity bias, information
JEL Classification: G11, G14
Suggested Citation: Suggested Citation