Home Bias

Home bias is one of the most empirically robust anomalies in international finance. Despite the well-established benefits of global diversification — reduced correlation, exposure to faster-growing economies, and a broader opportunity set — investors in nearly every country hold a disproportionate share of domestic equities. American investors are no exception: surveys and 401(k) data consistently show that US investors allocate 70-80% of their equity portfolios to US stocks even though the US represents roughly 60% of global market capitalization.

Multiple explanations have been proposed. Familiarity plays a central role: investors feel more comfortable with companies they know, brands they use, and businesses whose headquarters and media presence are local. This familiarity translates into perceived safety, even when it is analytically unjustified. The endowment effect may reinforce this: US investors who have held domestic stocks for years attach an ownership premium that foreign equities cannot match.

Information asymmetry provides a partial rational justification. US investors have easier access to filings, earnings calls, management presentations, and local sell-side research for American companies. The perceived information disadvantage in international markets — even accounting for the widespread availability of English-language financial reporting from most major global companies — is cited as a reason to underweight foreign holdings.

Practical considerations including currency risk, different accounting standards (GAAP versus IFRS), foreign withholding taxes on dividends, and the complexity of researching geopolitical environments add genuine costs to international diversification. But financial research suggests these costs are modest relative to the diversification benefits foregone.

For long-term US-based investors, maintaining a deliberate international allocation — typically 20-40% of the equity portfolio — provides exposure to different economic cycles, demographic profiles, and sector compositions that domestic markets alone cannot replicate.