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Market-Based Solutions to Vital Economic Issues
Research
Jul 2, 2021

Experimental Evidence of Source Preference: Familiarity and Home Bias

Abstract

This paper experimentally tests the Fox-Tversky (1995) source preference hypothesis as axiomatized in Chew and Sagi (2008) where people may have preference between equally distributed risks depending on the underlying sources of uncertainty. We study two forms of source preference. One is based on familiarity of risks arising from the trailing digit of stock prices in the home city exchange. Another is based on the trailing digit of the market index of the home city versus that of a foreign city. We find a familiarity-based source preference in portfolios comprising strictly dominated bets associated with more familiar stocks and in valuation of bets elicited using an ascending-price auction. Complementarily, we find a home bias in terms of Shanghai (Hong Kong) subjects preferring to bet on the trailing digit of the Shanghai Stock Exchange Index (Hang Seng Index) even though the same bets based on Dow Jones Industrial Average would pay more. Taken together, our study suggests that home bias is driven mainly by source preference rather than ambiguity aversion.

Note: Research papers posted on SSRN, including any findings, may differ from the final version chosen for publication in academic journals.  


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