Cao, Henry and Han, Bing and Hirshleifer, David and Zhang, Harold (2007): Fear of the Unknown: Familiarity and Economic Decisions.
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Evidence indicates that people fear change and the unknown. We offer a model of familiarity bias in which individuals focus on adverse scenarios in evaluating defections from the status quo. The model explains the endowment effect, portfolio underdiversification, home and local biases. Equilibrium stock prices reflect an unfamiliarity premium. In an international setting, our model implies that the absolute pricing error of the standard CAPM is positively correlated with the amount of home bias. It also predicts that a modified CAPM holds wherein the market portfolio is replaced with a portfolio of the stock holdings of investors not subject to familiarity bias.
|Item Type:||MPRA Paper|
|Original Title:||Fear of the Unknown: Familiarity and Economic Decisions|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates
G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions
F - International Economics > F3 - International Finance > F30 - General
G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets
|Depositing User:||Bing Han|
|Date Deposited:||01. Jan 2008 08:32|
|Last Modified:||22. Feb 2015 23:35|