There’s no place like home, but staying too close to home can have unintended consequences for investors. Americans tend to put a disproportionate share of their money into shares of companies based in their own states, new research has shown, and that bias that can be exploited by sophisticated traders. These insights come from “Long Georgia, Short Colorado? The Geography of Return Predictability,” a study by George M. Korniotis, an economist on the staff of the board of governors of the Federal Reserve, and Alok Kumar, an assistant professor of finance at the University of Texas, Austin. The tendency of investors to favor their home countries has been well documented. The new study goes beyond such “home bias,” using the term “local bias” to refer to investors’ tendency to favor companies from their home states.
The New York Times
The Perils of Staying Too Close to Home