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Eureka: Equity Home Bias Puzzle
by Jay Gutman
2017-11-22 11:58:58
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This puzzle has it that when people own equity, that is have money, they prefer investing in their own country rather than internationally. Some own no foreign equity, others have very little foreign equity. To some economists this contradicts the fact that people are rational economic agents who would seek to diversify their portfolio anywhere there are promises of returns.

equant01_400Again this puzzle makes assumptions about investment and the nature of the average man itself. In the movie Borat in the bonus part of the DVD, Borat tries to get a loan. He tells his American banker he is from Kazakhstan. “Kakakistan?” the teller keeps repeating. No “Kazakhstan.” Says Borat. “Oh Kakakistan” says the teller. You know all the statistics that have it that most people don't own a passport and that most people aren't very good at geography. I remember in graduate school a Chinese girl asking a girl where she was from. Spain, the girl said. Where's that? The Chinese girl asked. Funny thing is 6 months before that Spain had just won the footbal World Cup. Even better. A professor of international relations of mine, with a Ph.D. in international relations from an Ivy League University did not know what Turkmenistan was. With that kind of grasp of international affairs, how do you expect the average person do diversify their portfolio or to buy foreign equity?


Another explanation is there tends to be a lot of herd behavior in the nature of investment itself. If real estate is the big thing, lots of people start buying real estate. If stacking up on foreign currency is the new thing, lots of people will buy foreign currency. If investing in foreign stock markets is the new thing to do, lots of people will invest in the foreign stock market. In this “study” which is qualitative in nature, I studied different groups and how they invest their equity. Let me break the groups down for you.


English teachers in South Korea. A lot of them save enough money to invest some of it. The first trend I noticed was buying land in the Philippines. Land with a house and a plot of land that they could cultivate. To them that was a long-term investment where they hoped they would eventually retire in the Philippines and farm their plot of land. Another trend was to invest some of their savings by buying Hong Kong Dollars and Singapore Dollars, which they believed was more stable than the Korean Won or US dollars. A third and final trend was to buy real estate in their home country, i.e. Canada or the United States, hoping they would eventually go back home and settle. There was a great deal of herd behavior around the Philippines investment, as rumor went around that land was very cheap there and that you could buy a huge plot of land for as little as 10,000 dollars. But then again, most investments among foreign English teachers in South Korea involved opening a bar or pub or restaurant in South Korea, buying real estate in South Korea or opening different types of shops in South Korea. Only those who were single or divorced invested their equity outside South Korea.


Now to the average South Korean. The trend was buying land in Vietnam or Cambodia, farm land where they would cultivate rice or coffee or tea. Another trend was of course buying land in the Philippines, farm land as well. Some like to buy foreign currency, mainly US Dollars, mainly because they want to send their children to study in the United States and want to have that cash available for their children's studies. Others invested in Canadian, American or Australian real estate, again because they thought their children's future was there. But an overwhelming majority of the talk surrounding equity investment involved investing cash inside South Korea, either in the form of real estate or stocks or investing in companies. Another smaller trend I saw was buying North American and European bonds, because rumor had it that was a safe investment. But again the vast majority of South Koreans invest their equity in local investments.


Now to another country, France, where people don't talk about money as openly as North Americans or South Koreans. The French are known for not taking too many risks with money and tend to invest their equity in French real estate, usually in the form of buying rental property. Some might invest in businesses or stocks, but rarely risk it by buying foreign stocks. Rumor has it that foreign currency not being as robust as the Euro, few invest in foreign currency. Investments are heavily taxed as well, which means the French tend to be cautious with foreign investments. You have another argument for equity home bias: taxation.


I could go on and on. Overall, it's always that friend who buys property in the Philippines and convinces you it's a good investment. But not everyone has that kind of friend, let alone want to talk about money or investment openly. In a lot of districts, virtually no one has travelled or invested abroad, so a lot of the home bias in equity has to do with the worm in horseradish effect: to the worm in horseradish, the world is horseradish.

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