Stories | June 6, 2012

Did you know… about the danger of “home bias”?

“Fans bet too often on the teams they support, sometimes in the face of all reason.”

Various academic studies have found that fans are too quick to bet on their own team.

For instance, the German economists Sebastian Braun and Michael Kvasnicka looked at twelve European countries and found that many gamblers either put too much money on their own national team, or were reluctant to bet against it - even when that was probably the smartest bet. And the British economists David Forrest and Robert Simmons showed that Spanish gamblers too often put money on clubs with the highest attendances – in short, on the most popular teams. In gambling, these kinds of irrational bets are known as “loyal money”.
The same sort of bias exists in financial investing. Economists call it the “home equity bias”. This is a tendency for people to make too many of their investments in their home country, instead of spreading risk by buying in a wide range of countries.
Perhaps “home” investors think they are safer buying in their own country, because they know their home market best. Yet that confidence can shade into overconfidence, and overconfident investors, like overconfident gamblers, are prone to error. In the same vein, Norwegian research has found that investors often buy shares in firms in industries that they themselves work in, yet these investments typically underperform the market. Investors and gamblers tend to feel confident on familiar turf. But that confidence is often misplaced.
There’s another risk for European investors who show “home equity bias”. In the last decade, most European countries have had less economic growth than most countries outside Europe. In other words, the “home” investor might be missing out on some good opportunities abroad. Likewise, the gambler who bets on his own team could probably have found better bets elsewhere.

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Simon Kuper

Sports and economics author

InvestingBiasSport

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