Author Topic: Home country bias is fractal  (Read 1541 times)


  • Pencil Stache
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Home country bias is fractal
« on: May 10, 2016, 12:18:04 PM »
I want to bring up an interesting study on regional investing selection bias. Huberman (1990) examined geographic patterns of investments into Regional Bell Operating Companies (RBOC) after AT&T was forced to divest some subsidiary companies in 1984. The author does a great review of home country biases using many examples and also reviews why investors prefer their home country. For example, 16%, at time of writing, of CocaCola stock was held in Georgia. To be brief, one would expect that if one were simply interested in investing in AT&T, shares should have been split between AT&T and the RBOCs proportionally. Instead, they found that there was a correlation in the region serviced by the RBOC and the location of the held shares, both institutional and retail.

This study, though dated back to the turn of the 21st, should remind us to be wary of home country bias whether at the city, state, region, country, or continental scale and the dangers posed. For example:
A piece of anecdotal evidence: following the 1994 takeover of Gerber Products by Sandoz, the New York Times reported from Fremont, Michigan, that “hundreds of
local residents – including descendants of those farmers who first invested in the cooperative that became Gerber Products – are figuring out how to reinvest anywhere from the hundreds to tens of millions of dollars they will receive from the Gerber stock.” Fremont had 3,900 residents. Gerber directly accounted for 40% of local taxes and employed about 1,300 people according to the New York Times. (Feder, 1994.)
Imagine if something bad had happened to Gerber instead. The city of Fremont, MI would have been depressed by the loss of jobs and Gerber of course. But also by reduced spending of Gerber stock which would ripple through the city, effecting even non-shareholders.

It's a good read:


  • Walrus Stache
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Re: Home country bias is fractal
« Reply #1 on: May 10, 2016, 01:15:37 PM »
For example, 16%, at time of writing, of CocaCola stock was held in Georgia.

Haven't read the article yet. But this can be somewhat explained by employees getting stock options, and other local business concerns. For example, at the time the article was written, SunTrust (a GA bank) held a ~2-3% stake (guessing based on the stock price) that it had acquired in 1919 in a deal with Coke and just never sold (probably to avoid the taxes on the giant capital gains). Also, there's the Woodruff Foundation (based in GA) that got its money from the family that bought Coke in 1919 and ran the company for decades. Today, the foundation still owns about 1.5% of Coke and probably owned double that when the article was written (a guess based on how much money they give away). And similarly, multibillion dollar foundations setup by the families of Coke bottlers hold a lot of stock and are based in GA.

Maybe they should have diversified, but I wouldn't be surprised to hear that the donor instructions were to continue to hold Coke stock since it was such a sound investment that paid out great dividends each quarter. And those dividends could fund charitable spending easily without selling shares.


  • Pencil Stache
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Re: Home country bias is fractal
« Reply #2 on: May 10, 2016, 01:36:07 PM »
Yup, and that is exactly one mechanism of the home country bias phenomenon explored in the article. It's not all about "buy what you know". In fact, I think there is some evolutionary causes sensu the selfish gene theory. It makes sense to invest in and participate in local economies moreso than foreign economies because of geographically asymmetric benefits when shares rise.

Regardless of the mechanisms, home country bias geographically concentrates risks and that is the concern I see (e.g. the Gerber case I postulated).

Playing with Fire UK

  • Magnum Stache
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Re: Home country bias is fractal
« Reply #3 on: May 13, 2016, 04:51:05 AM »
In addition to the irrational bias, I think there is also a rational case for some home bias, assuming that you are planning to stay in the same place.

Assume my aim is to preserve my quality of life in the place I am living.

Part of quality of life is how much purchasing power I have compared to my neighbours; if they all get rich then the price of goods and services will rise, fancier restaurants will open locally and I will feel poorer if I have less spending power than them (both whiny keeping-up-with-the-Jones and rational market forces).

If I am in Freemont and invest in a global tracker, I expect global average returns; if Gerber does worse than the tracker, my spending power will go up relative to my neighbours; if Gerber does better then my spending power will go down.

If the drop in spending power means that I can't finance the life I want in Freemont, then I should consider putting more into Gerber. It's a less-stupid version of people who put into their family/friends' lotto pool - it's not that they think it will do better, but that they need to hedge the risk of it doing better (/the friends winning the lotto) and being priced out of their own market as a result.