Home Biased: A Case for More Indexing

Home Bias refers to the tendency to invest more heavily in one’s domestic equity market than global market-value proportions would suggest. Whether or not home-biased investing makes sense, the fact is that people in pretty much every country do it. This article addresses the question of whether if everyone’s doing it, does it matter? Or if everyone equally over-weights their domestic market does it all wash out, with the over-weights cancelling out the under-weights? We propose a simple model to answer this question, which produces surprising results.