Familiarity Bias by Sector: Professional Equity Investor Preference to Invest in Geographically Close Sectors
Abstract
The concept of familiarity bias, or the tendency for decision-makers to favor choices that are geographically or culturally closer to them, has been studied among individual investors. However, limited research exists concerning its prevalence among professional investors, specifically U.S. mutual fund managers. This study aims to assess whether such a bias influences mutual fund portfolio allocations in sectors geographically proximate to them. We measure the concept of proximity by quantifying the distance between the source of GDP in a given geographical region and the mutual funds' allocation in that same or different region. Utilizing a dataset of approximately 1,500 unique U.S. mutual funds from Morningstar Investor and Bloomberg Professional, we mapped sector allocations based on the Global Industry Classification Standard (GICS) to corresponding GDP figures at regional and state levels classified under the North American Industry Classification System (NAICS). Our findings suggest that there is support for familiarity bias, as indicated by a smaller calculated distance value between regional GDP sources and mutual fund allocations. However, the magnitude of these differences is minimal, suggesting that while proximity may influence investment decisions, its impact is relatively subdued.Interestingly, our analysis revealed notable similarities in sector allocations across a variety of regions and states. One possible explanation for this could be tracking error, which measures how much a portfolio varies from its benchmark index. Additionally, the study uncovered a high level of similarity in GDP sources across different geographical areas, which may be attributed to the subjectivity in mapping NAICS to GICS sectors. A major limitation of the study is the potential discrepancy between the registered addresses of mutual funds and the actual locations of the portfolio managers responsible for decision-making, a factor that could affect the validity of our findings. Despite these challenges, the study contributes to the existing literature by expanding our understanding of familiarity bias within the context of professional investing.
Subject Area
Psychology|Behavioral psychology
Recommended Citation
Montes, Oscar, "Familiarity Bias by Sector: Professional Equity Investor Preference to Invest in Geographically Close Sectors" (2023). ETD Collection for Fordham University. AAI30687916.
https://research.library.fordham.edu/dissertations/AAI30687916
