Cross-country differences in personality and the foreign bias in international equity portfolios

Abstract

In this study we investigate whether cross-country variation in investors’ mean openness to experience – one of the traits of the Five-Factor Model of personality – has an effect on the level of foreign bias present in international equity portfolios. Building on extant research showing a strong relationship between openness to experience and the attitude towards other cultures and risk, we argue that this personality trait is a construct that aggregates aspects of the psyche that influence the propensity to invest abroad. We find support for this hypothesis, showing that the more ‘open’ the country, the smaller the underrepresentation of foreign assets in its equity portfolio. Our analysis reveals that this result is driven by the reluctance of investors from developed countries to accumulate assets from developing countries and suggests that international asset allocation is to some extent affected by psychological biases.

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