In finance and investing, the Home bias puzzle is the term given to describe the fact that individuals and institutions in most countries hold only modest amounts of foreign equity, and tend to strongly favor company stock from their home nation.
This finding is regarded as puzzling, since ample evidence shows equity portfolios obtain substantial benefits from diversification into global stocks.
[1][2] Home bias in equities is a behavioral finance phenomenon and it was first studied in an academic context by Kenneth French and James M. Poterba (1991)[3] and Tesar and Werner (1995).
[5] Home bias also creates some less obvious problems for investors: by diminishing the cost of capital for companies it limits the shareholders' ability to influence management by threatening to walk out.
[citation needed] In addition, liability hedging and the perception of foreign exchange risk are other possible causes of the home bias.