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Familiarity bias in direct stock investment by individual investors

Shan Lei (Department of Economics and Finance, Franklin P Perdue School of Business, Salisbury University, Salisbury, Maryland, USA)
Ani Manakyan Mathers (Department of Economics and Finance, Franklin P Perdue School of Business, Salisbury University, Salisbury, Maryland, USA)

Review of Behavioral Finance

ISSN: 1940-5979

Article publication date: 23 November 2023

Issue publication date: 30 April 2024

230

Abstract

Purpose

This study examines the relationship between investors' familiarity bias, including the home bias and endowment bias, and their financial situations, expectations and personal characteristics.

Design/methodology/approach

Using the 2019 Survey of Consumer Finances, the authors utilize an ordinary least squares regression to identify the presence of endowment bias and home bias in individual investors' direct stock holdings and use a Heckman selection model to examine determinants of the extent of endowment bias and home bias.

Findings

This study finds that investors with higher income and more education, men, non-white investors and people with greater risk tolerance are actually at a greater risk of endowment bias. This study also identifies a profile of investors that are more likely to have a home bias: with less financial sophistication, lower net worth, older, female, more risk-averse, with a positive expectation about the domestic economy and a relatively shorter investment horizon.

Originality/value

This paper is among the first to use US investors' directly reported stock holdings to examine the individual characteristics that are correlated with greater familiarity bias, providing financial professionals with information about how to allocate their limited time in providing education to a variety of clients.

Keywords

Citation

Lei, S. and Mathers, A.M. (2024), "Familiarity bias in direct stock investment by individual investors", Review of Behavioral Finance, Vol. 16 No. 3, pp. 551-579. https://doi.org/10.1108/RBF-03-2023-0074

Publisher

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Emerald Publishing Limited

Copyright © 2023, Emerald Publishing Limited

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