Neuroticism and home bias

Abstract

In this paper I investigate whether neuroticism has a negative impact on investment in foreign securities, exacerbating the ‘home bias’ present while investing in stocks and bonds. This hypothesis is motivated by research which: (1) established a link between neuroticism and fear of uncertainty, (2) revealed that investors feel greater uncertainty when considering investment in foreign securities, and (3) shown that negative affect impacts in-group bias. I explore this hypothesis on both the country level (using cross-country observational data) and individual level (using the responses of students that were given a hypothetical investment scenario). Additionally, I explore whether the predicted relationship is further exacerbated when uncertainty or anxiety is high, or when the investment destination is dissimilar from the investors’ own country. The country-level analysis reveals that investors from high-neuroticism countries generally invest less in foreign equities than investors from other countries, and provides some support that this tendency can become more pronounced when investing in times of high uncertainty or in culturally dissimilar countries. The hypothesized relationship is also present in the responses of male students in a high-anxiety (stressful) condition. Given that professional investors are predominantly male, and work under high stress, this explains to some extent why investors have a bias towards domestic securities.