Fear of the Unknown: Familiarity and Economic Decisions

Henry Cao, Bing Han, David Hirshleifer and Harold Zhang

MPRA Paper from University Library of Munich, Germany

Abstract: Evidence indicates that people fear change and the unknown. We offer a model of familiarity bias in which individuals focus on adverse scenarios in evaluating defections from the status quo. The model explains the endowment effect, portfolio underdiversification, home and local biases. Equilibrium stock prices reflect an unfamiliarity premium. In an international setting, our model implies that the absolute pricing error of the standard CAPM is positively correlated with the amount of home bias. It also predicts that a modified CAPM holds wherein the market portfolio is replaced with a portfolio of the stock holdings of investors not subject to familiarity bias.

JEL-codes: F30 G11 G12 G15 (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-cbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/6512/1/MPRA_paper_6512.pdf original version (application/pdf)

Related works:
Journal Article: Fear of the Unknown: Familiarity and Economic Decisions (2011)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:6512

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().