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Archive for July, 2011

Another one for the annals of behavioral finance. From Handbook of the Economics of Finance, Chapter 18, A Survey Of Behavioral Finance by Nicholas BARBERIS, and Richard THALER, University of Chicago:

7.1 Insufficient diversification

A large body of evidence suggests that investors diversify their portfolio holdings much less than is recommended by normative models of portfolio choice. First, investors exhibit a pronounced “home bias” French and Poterba (1991) report that investors in the USA, Japan and the UK allocate 94%, 98%, and 82% of their overall equity investment, respectively, to domestic equities explain this fact on rational grounds [Lewis (1999)] Indeed, normative portfolio choice models that take human capital into account typically advise investors to short their national stock market, because of its high correlation with their human capital [Baxter and Jermann (1997)].

At the very least, it’s an argument for investing globally.

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