IESR 3rd Anniversary' Lecture

Title: Ambiguity, Familiarity, and the Equity Home Bias Puzzle

Speaker: Chew Soo Hong, National University of Singapore (NUS)

Time: December 3rd, 2018 10:00–11:15

Venue: Room 323, Zhonghui Building (IESR, JNU College of Economics)

About the speaker:

Chew Soo Hong is a Professor of Economics and Provost’s Chair at the National University of Singapore (NUS). He received his Ph.D. in Interdisciplinary Studies from the University of British Columbia and has taught at the University of California (Irvine), Johns Hopkins University and University of Arizona. Chew Soo Hong is among the pioneers in axiomatic non-expected utility models and a Fellow of the Econometric Society which awarded him the Leonard J. Savage thesis prize. He has directed HKUST's center for Experimental Business Research, and is Co-Director of NUS' lab for Behavioral x Biological Economics and the Social Sciences which aims to bring together genomics, neuroscience, decision theory, and behavioural and experimental economics in order to deepen understanding of decision making at the neural and molecular levels. Chew Soo Hong's work has appeared in such well-known journals as Econometrica, Journal of Economic Theory, Review of Economic Studies, PRSB, Neuron, PLoS ONE, and many others. 

Abstract:

The international equity home bias puzzle about the disproportionate concentration of home equities first appears in Feldstein and Horioka (1980) and French and Porteba (1991). This puzzle has inspired a substantial follow-up literature, including papers reporting its persistence even when examining only domestic US equities (Coval and Moskowitz, 1999; Huberman, 2001). Besides transaction costs and related hypotheses, a number of papers (see, e.g., Uppal and Wang, 2003) offer preference-based accounts based on the phenomenon of ambiguity aversion using models involving multiple priors (see, e.g., Gilboa and Schmeidler, 1989). In an influential paper, Fox and Tversky (1995) posit the notion of source preference – people may have preference over lotteries based in part on the underlying source of uncertainty – which has since been axiomatized in Chew and Sagi (2008). Fox and Tversky further suggest that familiarity bias as part of source preference may offer an alternative basis underpinning equity home bias. We offer experimental evidence for study the preference basis for equity home bias via two experiments – one involving US subjects and another involving Hong Kong subjects. In both experiments, we do not find a relation between ambiguity aversion elicited in the lab and subjects’ holding of foreign equities. We further measure the subject’s familiarity bias in terms of her premium in favoring a bet on the trailing digit of the domestic market index (DJIA for US subjects and HSI for Hong Kong subjects) over the ‘same’ bet based on the foreign market index. Supporting the Fox-Tversky hypothesis, we find a negative association between familiarity premium and the extent of subjects’ foreign equity holdings. Overall, our findings favor familiarity bias over ambiguity aversion in providing support for a preference-based account to the equity home bias. We further explore the neurogenetic underpinning of familiarity bias through two studies involving molecular genetics and neuroimaging. Our finding of a link between familiarity bias and the GABA neurotransmitter underpinning anxiety and fear enables a deeper understanding of a decision making disposition which can have implications at the level of financial markets.