ABSTRACT
The aim of this study is to present and test a behavioural explanation for the variation in the average level of foreign bias across countries. Similar to Beugelsdijk and Frijns (2010), we argue that the degree of underinvestment in a foreign market is in part driven by the risk propensity of investors from a given culture. However, contrary to their study, we argue that the sub-optimal allocation of funds abroad is to a certain extent the result of investors’ attitudes towards other cultures, which in turn can be approximated by the openness to experience trait from the FiveFactor Model of personality. We conduct a test of this hypothesis on the basis of an extensive personality study of cultures supervised by McCrae and Terracciano (2005) that yielded mean personality trait levels in each culture. The results we obtain show that the cultures that score higher on the openness to experience factor exhibit a smaller degree of foreign bias, thus confirming our hypothesis.
