Behavioral Biases and Portfolio Choice

Posted: 26 Jul 2003

See all articles by Massimo Massa

Massimo Massa

INSEAD - Finance

Andrei Simonov

Michigan State University - Eli Broad Graduate School of Management; Centre for Economic Policy Research (CEPR)


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

Massa, Massimo and Simonov, Andrei, Behavioral Biases and Portfolio Choice. Available at SSRN:

Massimo Massa

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
+33 1 6072 4481 (Phone)
+33 1 6072 4045 (Fax)

Andrei Simonov (Contact Author)

Michigan State University - Eli Broad Graduate School of Management ( email )

645 N. Shaw Lane, 321 Eppley Center
East Lansing, MI 48824-1122
United States


Centre for Economic Policy Research (CEPR) ( email )

United Kingdom

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