emerging markets and the global economy || cultural behavioral finance in emerging markets

CHAPTER1414Cultural Behavioral Finance inEmerging MarketsBrian M. Lucey*,†,‡ and Michael Dowling§*School of Business Studies and Institute for International Integration Studies,Trinity College Dublin, Ireland†Glasgow Business School, Glasgow Caledonian University, Glasgow, UK‡Faculty of Economics, University of Ljubljana Kardeljeva, Ljubljana, Slovenia§DCU Business School, Dublin City University, Ireland

1. INTRODUCTION

This chapter provides a comprehensive review of the role of investor psychology andculture in emerging markets. A key conclusion is that an understanding of behavioralinfluences on investors in emerging markets must be driven by an acknowledgmentof the mediating role of culture in decision making. Further, we conclude that thismediating role for culture varies according to behavioral principle, with some behaviorsvarying predictably according to cultural differences, some applying more to particularcultural groups, and some behaviors are best viewed as innate and static across cultures.A mediating role for culture is something which we find to be generally lacking in priorbehavioral finance studies in emerging markets,with the majority of cross-country studiesassuming universal behavioral principles.

We take the MSCI Emerging Markets constituent index as our reference point fordefining emerging markets, thus we include Asian, Latin American,African, and EasternEuropean country studies in the review. However, the vast majority of studies reviewedare concentrated onAsian markets due to the preponderance of research in these markets.This does not necessarily hamper the review, rather the suggested predictable mediatingrole for culture proffers fruitful theoretical avenues for future behavioral finance researchin these neglected regions.

The structure adopted is that Section 2 analyzes the mediating role culture is likelyto play, and has been shown to play, in investor financial decision-making approachesacross countries. Section 3 reviews the key findings on behavioral finance in emergingmarkets analyzed within an overarching behavioral finance framework and with refer-ence to developed economy studies of the behavioral principles. The review of culturalinfluences in Section 2 is applied to understand differences between emerging marketand developed economy findings. Finally, Section 4 summarizes the key findings on cul-ture and behavioral finance, and proposes directions, based on this, for future behavioralfinance studies in emerging markets which is cognisant of the likely role of culture ininvestment decision making.

Emerging Markets and the Global Economy © 2014 Elsevier Inc.http://dx.doi.org/10.1016/B978-0-12-411549-1.00014-4 All rights reserved. 327

http://dx.doi.org/10.1016/B978-0-12-411549-1.00014-4

328 Brian M. Lucey and Michael Dowling

2. CULTURE AND FINANCIAL DECISIONMAKING

National culture is an area that has only in recent years begun to penetrate into theresearch agenda of finance and economics. This is surprising given the prominence ithas achieved in cognate areas, notably international business. National culture has beenshown in Kirkman et al. (2006) to impact on literally hundreds of international businessand management research papers on foreign direct investment, mergers and acquisitions,the modality of market entry, managerial control, capital structure, and on the structureof corporate and national financial systems.This section outlines some aspects of nationalculture and then looks at such research as is on how this impacts on emerging markets.

2.1. Conceptualizing National Culture and its Interaction with FinanceCultural factors can and do have a significant impact on financial decision making. Finan-cial decisions are driven by information costs and asymmetry, agency costs, moral hazard,and incomplete contracts. In order to mitigate some of the effects of these imperfec-tions, economists and researchers argue that agents develop contracts that better alignthe interests of the various economic agents involved within the legal framework in agiven jurisdiction.This approach underlies the burgeoning law and economics literature,however all such contracts are necessarily incomplete as specifying all contingencies isimpossible in practice. Contracting parties are thus forced to depend on the interaction ofrelative ethics, social mores, and customary business practices—all these are collectivelypart of what we commonly term culture. Thus, from first principles we can see thatcultural and other soft measurements of the nature of social and business interactions areimportant determinants of economic and financial decisions.

Consequently, financial scholars have become increasingly aware of the extent towhich disciplines such as genetics (Maddox et al., 1984); anthropology, geography, his-tory, and philosophy (House et al., 2002); and psychology (O’Grady and Lane, 1996)contribute to our understanding of the determinants of national culture. National cul-ture in turn has been found to impact major elements of financial decision making. Wesee research that links culture or variations in national culture to the structure of finan-cial systems (Aggarwal and Goodell, 2009a,b); intra-firm valuation of subsidiaries (Antiaet al., 2007); compensation practices (Schuler and Rogovsky, 1998); dividend payout pat-terns (Fidrmuc and Jacob, 2010); corporate governance (Bushman et al., 2004; Breuerand Salzmann, 2012); foreign portfolio investment (Aggarwal et al., 2012); and corporatecash holdings (Ramírez and Tadesse, 2009). All of this evidence indicates that culturesignificantly impacts financial decision making (Kirkman et al., 2006).

Culture is neither conceptually nor empirically easy to measure. Taras et al. (2009)provide an extensive authoritative overview of 121 approaches to measuring culture.Culture is a complex, multilevel construct that has basic assumptions and values at itscore, and is buttressed by practices, symbols, and artifacts. The most commonly used

Cultural Behavioral Finance in Emerging Markets 329

measures are by Hofstede (2001) who describes four essential but orthogonal dimensionsof national culture: individualism, power distance, uncertainty avoidance, and masculin-ity. More recently, researchers using the Hofstede approach have added a fifth, long-termorientation. Each of these dimensions, and combinations of them,has potential effects onfinancial decision making. While there are alternative frameworks of measuring nationalculture and psychic distance, such as Schwartz and Sagiv (1995) and House et al. (2002),most finance researchers who have examined national culture have used Hofstede’s mea-sures, with smaller numbers using the WorldValues Survey (Inglehart and Welzel, 2005).

A society’s degree of individualism refers to the extent that its members tend tobe loosely connected and responsible for their own wellbeing, rather than being closelyconnected within cohesive groups that offer protection in return for loyalty which occursin collectivist societies. High individualism societies tend to emphasize the importanceof individual motivation and individual rather than group decision making, and withcompensation based on the individual’s contribution rather than on the group’s perform-ance. A recent work by Gorodnichenko and Roland (2010) suggests that countries thatdemonstrate higher levels of individuality grow faster and are wealthier. All things beingequal therefore a greater distance in individuality would correspond to greater wealthdisparity and greater investment opportunities.Also, suggested,by this research is a greaterrole for individual cognitive biases in highly individualistic societies (this is exploredfurther in Section 3.1).

The degree of masculinity in national culture refers to the extent that societies empha-size and reward the male characteristics, these are taken to be assertiveness, competition,and success counterpoised to female characteristics of nurturance and support, and it alsoembodies the extent to which societal members are expected to manifest and performthese roles. Societies that score high on masculinity tend to exhibit behavior towardachievement rather than solidarity, confrontation rather than cooperation, and intellec-tual independence rather than moral obligation. Although the degree of masculinity doesnot correlate with the other dimensions (except uncertainty avoidance, with a statisti-cally significant positive value in wealthier countries and a marginally significant negativevalue in poorer countries), this is perhaps the least accepted of the four because it is moredifficult to distinguish its implied behavioral traits.

The concept of power distance was developed by Mulder (1977) and built upon byHofstede (2001) to refer to the differential weights that societies assign to inequality inpower, status, and wealth, and the extent to which society expects that power should beshared unequally among its individual members. House et al. (2002) in their developmentof the project GLOBE trace the roots of this cultural dimension to Plato’s argument forthe merits of an elite ruling class in the 4th century BC, to Confucian and Hindu philos-ophy that respects tradition and seniority, to the Hobbesian 17th century recognition ofthe need for checks on individual greed and ambition. Low power distance cultures tendto disseminate information broadly, to provide broad access to education and resources


for personal development, to exhibit substantial social mobility, and to encourage partici-pation in discussion and critique during corporate decision making. By contrast, highpower distance cultures tend to exhibit localized information, unequal access to educa-tion and resources, and to corporate decision making by those in positions of senioritywith limited input from subordinates, and limited social mobility. Confucianism, Hin-duism, Catholicism, and Islam tend to be high in power distance, while Buddhism andProtestantism tend to be low in power distance.

The concept of uncertainty avoidance is familiar to financial analysts and researchers,particularly given the many tools that have been designed to manage risk and to financiallyengineer preferred combinations of risk and reward. Initiated by Cyert and March (1953),the uncertainty avoidance dimension in national culture was developed by Hofstede(2001) to capture the anxiety that people feel when exposed to ambiguity and uncertainty.Societies construct mechanisms to cope with uncertainty that fall under three mainheadings: technology (which helps us cope with uncertainties of nature), law (whichhelps us cope with uncertainties caused by the behavior of other people), and religion(which helps us cope with uncertainties we cannot otherwise defend against). Highuncertainty avoidance societies tend to exhibit more complete accounting disclosures,less risk-taking, lower ambition for personal advancement, greater resistance to change,and higher average age in senior positions.

Long-term orientation is a metric of thrift,of persistence. It relates to tradition in thatlong-term orientation also involves conservatism in relation to actions. Countries withhigh long-term orientation emphasize hard work, high savings, and family orientation.It may be difficult to effect change in these societies but when change is so effected it isincorporated into the traditional set and becomes embodied. Not all countries have beenmeasured with regard to long-term orientation and as a consequence it is frequently notincorporated in research.

As noted there are other conceptualizations of culture. Chui and Kwok (2009) use theproject GLOBE cultural measures to examine the determinants of life assurance. Shaoet al. (2009) examine the determinants of national dividend policy using the Schwartzmeasures (Schwartz and Sagiv, 1995). However, the WorldValue Survey data appears tobe rarely used as correlates, in finance research, of national differences. An exception isGeorgarakos and Pasini (2009) on stock market participation in Europe. The Schwartzmeasures have been used by Breuer and Salzmann (2012) in the evaluation of corporategovernance issues.

2.2. National Culture and Emerging MarketsWhat then do we find when we examine the interaction of national culture and emerg-ing markets finance? It is difficult to identify papers that make such an explicit split.This suggests that heretofore this issue, of the potential differential effects of nationalculture on emerging versus developed markets, was not identified. It should be notedthat the emerging versus developed markets split is not particularly useful from a cultural


perspective. A prediction of difference is not driven by this division, but rather that thediverse cultural groups within the emerging market group are likely to display differingfinancial behaviors compared to the relatively culturally homogenous group of developedcountries. With that proviso in mind, there have been a limited number of studies thathave examined cultural variances in financial behavior incorporating a range of emergingmarkets in the investigation.

Aggarwal and Goodell (2009b) suggest that uncertainty avoidance is an importantelement in the depth of equity markets. Examining corporate valuationAntia et al. (2007)include emerging markets but unfortunately do not separate out these findings from thegeneral findings of a negative relationship between cultural distance and valuation.

Examining corporate governance, via a combination of the Schwartz and Hofst-ede approach (but focusing mainly on Schwartz), Breuer and Salzmann (2012) findcompelling evidence of a relationship.They find for emerging regions that single culturalattributes strongly correlate with governance. Mastery, similar to power distance, emergesas the main cultural attribute, which affects corporate governance in Africa and MiddleEast countries.A similar,albeit firm level,analysis was undertaken using Hofstede measuresby Jiatao and Harrison (2008) who did not separate the data along emerging/developedmarket lines.

Gorodnichenko and Roland (2010) do provide some evidence along regional lines,with the Hofstede measure of individualism (and Schwartz analogs of same) being moreimpactful on wealth measures in Africa, having nearly double the impact than it does onOECD countries. Investigating corporate cash holdings,neither Chang and Noorbakhsh(2009) nor Ramírez and Tadesse (2009) explicitly look at the developing/emerged splitbut in the case of Ramirez and Tadesse they segment by political risk scores. Given thatemerging markets tend to have higher such scores, the finding that after controlling forHofstede measures, political risk is no longer an important determinant of cash holdings,implying cultural variation is the cause.

While the overview above suggests cultural influence in emerging markets, it merelyhighlights the cultural differences without attempting to explain the decision-makingprocess that might be causing the differences. This is not particularly useful in terms ofgeneralizability to other areas of financial decision making. What is required is a con-fluence of the cultural and behavioral finance literatures, given that the latter focuses onexplaining the psychological decision-making processes that influence financial decisionmakers. The next section addresses this absence in the literature.

3. BEHAVIORAL FINANCE IN EMERGINGMARKETS: A CULTURALPERSPECTIVE

This section reviews the key prior research investigating the ability of behavioral financetheories to explain emerging market investor behavior and asset pricing. The cultural


influences highlighted in Section 2 are applied to understand differences between emerg-ing market and developed economy behavioral finance findings.

The behavioral finance framework followed for this review is that of Hirshleifer (2001)who proposes four categories of behavioral biases that influence investors:• Heuristic Simplification: Because of limits to cognitive processing abilities and the pres-

ence of excessive information required to be processed for complex decisions,investorsrely on cognitive heuristics, or “rules of thumb,” to guide them in their decision mak-ing. This is generally an efficient information processing approach, but a numberof biases also emanate from these heuristics, which can be priced in aggregate assetprices.

• Self-Deception: People are naturally overconfident through evolutionary development.Positive self-image can be self-fulfilling; for example, it can help people to per-suade others of their ability and their viewpoint. However, self-deception can alsolead to an excessive belief in one’s own ability and powers of analysis to the detri-ment of perhaps ignoring the (possibly superior) information, advice, and actions ofothers.

• Emotions: The emotions experienced throughout the decision-making process, andemotions felt toward possible outcomes, influence the eventual decision, especially incomplex investment decisions.

• Social Dynamics: Given the social nature of human society, it is argued that investor’sviews and opinions are molded, in part, by the views and opinions of those peoplewithin the social set of the person. Some biases emanate from this social interaction,especially concerning conformist thinking.Each subsection briefly addresses the main theory for the category of behavioral bias

argued to influence investors, overviews the leading empirical studies of the theory, andthen evaluates the application of the theory in an emerging market context. A focusfor the emerging market analysis is the differences observed from the main studies ofdeveloped markets, and the influence that culture might have in driving these findings.We start with a brief discussion of which psychological behaviors are likely to be mediatedby culture.

3.1. Cultural Variances in PsychologyMarkus and Kitayama’s (1991) highly influential work on culture and the self suggestspaths with which culture might interact with psychology. They characterize Westerncultures (particularly the USA) as being characterized by an independent self, whileother cultures, including in Asia and Africa, are best characterized as interdependentselves. An independent self is internally, personally focused and thus likely primarilydriven by the psychological theories that are the focus of modern investor psychology.An interdependent self, on the other hand, will be driven by these same behaviors, butthere will be a greater role for culture to mediate the behaviors. The groupings behind


this argument are related to the Hofstede cultural dimension of individualism versuscollectivism.

A key decision-making difference is that interdependent selves tend to approach deci-sion making in a holistic manner—seeking overall meaning of systems of organization—while theWestern analytic approach tends to focus more on context-driven formal logicprocesses (Nisbett et al., 2001). Holistic cognition is characterized less by the rule andobject-based approach followed in the Western analytic cognition process, and insteadrelies on a more generalist assessment with influence from one’s social network. Withformal logic processes playing less of a role in holistic decision making, many of thecognitive biases that derive from heuristic simplification (as discussed in the followingsection) will have less of an ability to influence decision making in cultures characterizedby this form of decision making. Instead, culture and behavioral biases not explicitlylinked to formal logic processes, such as social dynamics, are likely to play a greaterdecision-influencing role in these cultures.

An important issue to additionally consider in terms of interpreting current empiricalstudies of emerging markets versus developed markets is the role of experience. Expe-rience can determine the influence of biases on financial decision making, with lowerexperience leading to greater reliance on heuristics (Feng and Seasholes, 2005; Nicolosiet al., 2009).Thus traders in developing markets where there is possibly lower knowledgeof trading behavior and optimum financial decision are likely to default to reliance onheuristic simplifications to guide behavior.This immediate driver of behavior should pre-sumably counteract any longer-term broadly experienced tendency of a culture towardlesser reliance on cognitive biases.

This suggests a broad hypothesis that heuristic simplification (as it is currently under-stood in the behavioral finance literature) will influence both developed and emergingmarkets but for different reasons: developed markets due to higher reliance on formallogic processes; emerging markets due to inexperience.We further expect that emergingmarkets, due to the background of collectivist cultures, will display a greater influencefrom social dynamics due to higher reliance on social networks and social feedback.

Further research presented in the remainder of this section argues that self-deceptionis strongly culturally mediated by individualism versus collectivism. We also argue thatemotional bias is best viewed as a universal influence at this early stage in the developmentof emotion research in finance; but that there are some cultural distinctions within typesof emotions that could be explored further in future research.

3.2. Heuristic SimplificationGiven that investing in equity markets involves highly complex decision making, it isargued that this leads to the use of cognitive heuristic simplification rules to guide decisionmaking.These heuristic rules are commonly divided into three groups: representativenessand conservatism; framing; and salience and availability.


3.2.1. Representativeness and ConservatismRepresentativeness refers to how people judge the probability of a hypothesis matching adataset or an event matching a class of events based on the similarity between the hypoth-esis and dataset or based on how typical the event is of the class of events (Kahnemanet al., 1982). Biases include base-rate underweighting (overweighting the conditionalprobability and underweighting the unconditional probability) and sample size neglect(attaching too great a weight to small samples of a population and too little weight tolarge samples of a population).

While base-rate underweighting has largely been subsumed into a noise trader lit-erature (e.g., Cutler et al., 1990) which is no longer in favor, significant advances havebeen made in recent years in understanding the influence of sample size neglect in invest-ment decision making. Rabin andVayanos (2010) summarize the investment implicationsprimarily as excessively extrapolating short-term investment performance including therecent past performance of mutual funds in what is described as the “hot hand effect.”Thus investors have been shown to switch in to mutual funds with good recent perfor-mance despite a general lack of persistence to these performances and the cost of switch-ing (Cashman et al., 2012). Similar overreaction to short-run performance is found inthe classic papers of De Bondt and Thaler for equity prices (1985) and security analysts(1990).

An important potential difference forAsian emerging markets is highlighted in Ji et al.(2008) who document how Chinese investors are more likely than Canadian investorsto predict a reversal in a price trend (Canadians in the study tended to assume a short-term trend would continue in the same direction). However, Chen et al. (2007) findthat individual Chinese investor trading accounts do show evidence of buying equitieswhich have had a positive four-month prior performance, suggesting a universality oftrend following.They do note though that in culturally collectivist countries, like China,there should be less of a regret aversion motivation for trend extrapolation trading com-pared to individualistic cultures.There is also some evidence to suggest that extrapolatingexcessively from small samples is a universal human behavior,with the effect documentedin remote tribes (Shuar hunter-horticulturalists in the Amazon) as well as in developedcountries (Wilke and Barrett, 2009) thus representativeness might be a behavioral biaswhich is relatively immune to cultural influence.

Under the heuristic of conservatism, people are argued to overweight base rates andunderweight new information, for example, people are slow to adjust base rates whennew information arises (Edwards, 1968). A similar heuristic is proposed by Lord et al.(1979), who find that people are slow to change their beliefs even if evidence suggeststhat they should. Griffin and Tversky (1992) argue that investors excessively react toextreme, high salience, information, and underreact to numerical base-rate information;this drives both representativeness with respect to high salience information, and leads toconservatism through underreaction to base-rate information.


Consistent with conservatism, investors appear to underreact to certain types of newsevents, including stock splits, earnings announcements, and mergers and acquisitions (seeIkenberry and Ramnath (2002) for a review and application to stock splits). This con-servatism is also present in emerging markets with trading on conservative reactions toearnings announcements profitable across 32 emerging markets (Van der Hart et al.,2003).Combining both representativeness and conservatism in financial markets, Griffin et al.(2010) find no evidence that these behaviors vary across developed and emerging markets.This suggests that these behavioral influences are currently best viewed as universal.

3.2.2. FramingTversky and Kahneman (1981) find a framing effect in how people make decisions;namelythat how a problem is presented can significantly affect the choices made. Specifically,people tended to frame choices“narrowly”; that is a set of choices are assessed in isolation,rather than as being choices that can be placed in a universe of choices,or as choices with amultitude of implications (Hirshleifer, 2001). A major framing bias is “anchoring,”which,as developed byTversky and Kahneman (1974), refers to how people make a decision bystarting at a specific reference point and then adjusting away from that reference point asnew information is added. An application of anchoring is “loss aversion”, where peopleare argued to assess the performance of a selected choice relative to the initial value ofthat choice (or the value at the time of the last performance assessment), i.e., the initialvalue of the choice is the anchoring point.This leads to decisions being assessed in termsof gains and losses (or break-even). Kahneman and Tversky’s (1979) “prospect theory” isprimarily based on loss aversion.

Benartzi and Thaler (1995) address the issue of the equity premium puzzle usingprospect theory. They argue that the premium could be due to the framing effect ofinvestors re-evaluating their portfolios on a regular basis. For example, if an investor re-evaluates their portfolio every month, it is almost equally likely that the performance overthe past month will be negative or positive. If an investor re-evaluates performance everyfive years it is highly likely that the performance will be positive. Given investor’s lossaversion, Benartzi and Thaler conjecture that the equity risk premium could be due toregular investor portfolio re-evaluation.Their study shows that if investors evaluate theirportfolios on a (intuitively appealing) yearly basis, this could explain the equity premium.Prospect theory has also been linked to a tendency on the part of investors to hold onto losing stocks too long ignoring the tax benefits of selling (Grinblatt and Han, 2005).More generally, loss aversion is shown to be a significant feature of investment decisionmaking among market participants (Hwang and Satchell, 2010) and finance professionals(Eriksen and Kvaloy, 2009).

Some evidence exists that prospect theory and loss aversion are particularly pro-nounced in emerging markets. For example, Estrada (2002) finds an applicability for aD-CAPM model which emphasizes downside risk in expected return across emerging


markets, and suggests this is more pertinent to emerging markets than developed mar-kets. Chen et al. (2007) also find a reluctance to sell loser stocks using Chinese householddata. Research on how culture might influence financial decision framing is generallyabsent, hampering a generalized view of the interaction between framing and culture inemerging markets, however it is commonly noted that framing effects should be cultur-ally determined without providing specifics for any particular country or cultural region(Elliott and Hayward, 1998; Van Gorp, 2007).

3.2.3. Salience and AvailabilityThe salience or availability of information relevant to a decision influences probabilityassessment (Bordalo et al., 2012). Information that is recalled with greater ease is assigneda greater weight in probability assessment. This includes recently received informationbeing weighted greater than older information (Hogarth and Einhorn, 1992) and vividimages and personally salient information being weighted greater than abstract informa-tion (Kahneman and Tversky, 1973). Biases related to salience and availability include:hindsight bias (past events remembered as more predictable than they actually were), andthe familiarity bias (being familiar with something leading to judgements of less riskiness).

Hindsight bias has primarily been investigated in financial markets by means of experi-mental studies as the nature of the bias creates difficulty in designing tests for aggregatefinancial data. The area is relatively understudied. An example of the testing approachis seen in a recent experimental study by Biais and Weber (2009) which tests for thepresence of hindsight bias among German and UK investment bankers, and generallyfinds the presence of the bias when participants are questioned about the volatility ofpast economic and financial events. Greater perceived predictability and lower volatilityof past events is reported than was actually the historic situation.

Given the paucity of studies on hindsight bias in financial decision making in generalit is unsurprising that the bias has not been directly studied among emerging marketsinvestors. However, psychological research suggests that the presence of hindsight biasshould be more pronounced in certain emerging markets compared to studies of Euro-pean or US investors.Yama et al. (2010) argue that hindsight bias is more pronounced inAsian countries compared toWestern countries due to a prevalence of holistic cognitiondecision making processes in these countries.

The familiarity bias is widely studied through assessment of investor portfolio diver-sification. The main findings are that investors tend to invest in the equity of compa-nies that are situated close to where they live, and the level of investment is in excessof what is suggested for a properly diversified portfolio (Grinblatt and Keloharju, 2001;Huberman,2001;Massa and Simonov,2006).This appears to be driven by investors feelingmore comfortable investing in local companies that they think they understand, althoughanalysis of investor portfolios of local equity holdings shows that these investments haveno ability to outperform the market (Seasholes and Zhu, 2010). Coval and Moskowitz


(1999) draw a general link between local bias and the overall home bias that investorsexhibit of excessive allocation of investment to their own country’s equities,which is notexplainable purely by rational factors such as transaction costs and regulations.

With regard to emerging markets and familiarity bias Chiou (2008) demonstratesthat emerging market investors (primarily in Asia and Latin America countries) standto gain the most from international portfolio diversification compared to developedeconomy investors. Thus the presence of familiarity bias in emerging market investordecision making would be particularly damaging to investment performance. Despitethis, emerging market countries are generally strongly home biased in terms of invest-ment; Fidora et al. (2007), using 2003 International Monetary Fund statistics, report thatemerging market country investors allocate just 3.3% of their portfolios to developed mar-kets, which constitute 83.1% of world market capitalization. Some partial explanationsfor this underdiversification are not behavioral; including transaction costs and barriers(Warnock, 2002), information asymmetries and local information advantages (Coval andMoskowitz,2001;Dvorak,2005). However,recent explanations have focused on explicitlycultural explanations for portfolio diversification patterns:namely,patriotism,and culturalfamiliarity.

Morse and Shive (2011) find that home bias is strongly related to level of patriotism,with a 1 standard deviation lowering of patriotism associated with 3–5% increase ininvestment in foreign markets. Contrasting the emerging markets groups,we can see thatLatin American and African countries usually display high patriotism and therefore lowexternal diversification.Asian countries are underrepresented in the study due to samplingissues,for example China is not included. Russian and Eastern European emerging marketcountries are outliers in the study; displaying very low levels of patriotism but still notdiversifying overseas, perhaps due to institutional issues.

The direction of foreign investment in a portfolio also appears to be driven by culturalfamiliarity. Chan et al. (2005) find that common language helps determine foreign invest-ment destination,something of relevance in the emerging market subgroupings.Aggarwalet al. (2012) explicitly test whether cultural familiarity,using a gravity model and Hofstedecultural dimensions, drives foreign investment choice on the part of investors, and con-firm a significant role for culture.These results include all the emerging market countries,which are observed to cluster together in terms of the individualism and power distancecultural dimensions.

The research reviewed above on familiarity bias prompts an addition to the frameworkfor understanding cultural behavioral finance in emerging markets. The familiarity biasis explicitly culturally rather than psychologically driven, yet it is commonly includedin the family of investor psychology biases. This suggests that the investor psychologyliterature has tended to conflate psychological and cultural variations in behavior, whichcontributes to poor understanding of the drivers. This is also observed in the review ofsocial dynamics influences in emerging market financial decision making.


3.3. Self-DeceptionPeople are naturally overconfident through evolutionary development. Positive self-imagecan be self-fulfilling; it can also help people to persuade others of their ability and theirviewpoint. However, self-deception can also lead to an excessive belief in one’s ownability to the detriment of perhaps ignoring the (possibly superior) information, advice,and actions of others (Goleman, 1997). An important feature of overconfidence is anexcessive belief in one’s abilities (Kruger, 1999).

There is widespread evidence that people, especially men, are overconfident. Studiesof probability judgements (calibration studies) find that people demonstrate excessivelyoptimistic confidence that their estimates are correct (Alpert and Raiffa,1982). For exam-ple, Alpert and Raiffa find in an experimental study that when people claim they are98% confident in the accuracy of an estimate, they should only be 60% confident.

Overconfidence is partially due to biased self-attribution. Under biased self-attribution, people attribute successful outcomes to their own actions, and unsuccessfuloutcomes to the actions of others or bad luck (Langer and Roth, 1975). Another contri-bution toward overconfidence is hindsight bias, where past events seem more predictablethan they actually were. People also tend to seek out information that confirms theirbeliefs rather than disproves them (confirmation bias), and this reinforces overconfidence(Isenberg, 1986).

In financial market studies, overconfident traders have been shown to trade too fre-quently (Barber and Odean, 2001), which has been linked to sensation-seeking on thepart of investors (Grinblatt and Keloharju, 2009) and biased self-attribution (Statmanet al., 2006). Overconfidence has been particularly studied in terms of corporate finan-cial decision making, with overconfident CEOs associated with higher levels of mergersand acquisitions (Malmendier and Tate, 2005), increased financing reliance on retainedearnings (Deshmukh et al.,2013),but also with increased levels of firm innovation throughhigher risk-taking willingness (Hirshleifer et al., 2012).

Overconfidence has proven particularly fruitful in terms of understanding emergingmarket investment behavior. This is driven by Hofstede’s individualism measure wherecountries high in individualism display higher levels of overconfidence through higherbiased self-attribution and cultural upbringing (Heine et al., 1999). Thus, Chui et al.(2010) find that the profitability of momentum strategies, linked to investors excessivelyattributing the profitability of short-term trend trading to their own decisions, is primarilya feature of markets in countries high in individualism and is largely not a feature ofcollectivist cultures such as East Asian countries. Studies of CEO overconfidence inemerging markets are confounded by a lack of simultaneous cross-country studies. Forexample, Huang et al. (2011) find that overconfident CEOs make investment decisionsbased on overconfident projections of future cash flows; but we do not know the extentto which the prevalence of overconfident CEOs in China differs from overconfidentCEOs in, e.g., the USA. A recent study by Graham et al., (2013) does suggest there is a


different prevalence of overconfidence. They survey US CEO and CFOs to determineconfidence levels and optimism and compare this to similar responses from non-USexecutives in Europe and Asia. US executives are found to display significantly moreconfidence,optimism,and risk tolerance,suggesting a similar lack of generalizability acrosscultures to CEO overconfidence studies,as seen for investor overconfidence. In particular,a country’s individualism vs collectivism score is an important mediating determinant thatmust be considered.

3.4. EmotionsThere is persuasive evidence that emotions, feelings, and mood states influence decisionmaking, this is particularly true when the decision involves conditions of risk and uncer-tainty (Loewenstein et al.,2001;Schwarz and Clore,2003;Slovic et al.,2002).The generalfinding is that people in good moods are more optimistic in their assessments of futureprobabilities, benefits, and risks, while people in bad moods are more pessimistic (Wrightand Bower, 1992). People can misattribute the source of their mood state and allow it toinfluence other decisions they make (Schwarz and Clore, 1983).

Research in behavioral finance has investigated whether investors might misattributemood states linked to widely experienced mood influencers, such as weather andbiorhythm variables, and allow them to influence their investment decisions (for a sum-mary of this literature, see Lucey and Dowling,2005). However, this can best be describedas a nascent literature.

Hirshleifer and Shumway (2003) find a relationship between bright sunshine days(linked to positive mood states) and positive equity returns, while Kamstra et al. (2003)find a pattern in equity returns that mirrors the pattern in mood variation linked toSeasonal Affective Disorder. Dowling and Lucey (2008) find a pattern of temporal moodinfluence across 37 country stock markets, including a number of emerging markets andfind a broad similarity to the extent of the influence of emotions.

Another approach to understanding how emotions influence investment is based onthe work of Paul Slovic and colleagues. They particularly concentrate on “affect,” oremotions toward a risky activity, with a key finding being that affect appears to directboth the perceived benefit and the perceived risk of the activity (Finucane et al., 2000).

If an activity was “liked”, people tended to judge its risks as low and its benefits as high. If theactivity was “disliked”, the judgements were the opposite – high risk and low benefit. (Finucaneet al., 2000, p. 4)

This affect heuristic appears to influence investment. MacGregor et al. (2000) col-lected affect ratings of various industries from a sample of participants for 20 industries. Inaddition to finding the affect rating associated with each industry, participants were alsoasked to estimate the performance of the industry in the previous financial year, the per-formance of the industry over the coming year, and to say whether they would be willingto buy into an IPO from a company in the industry. Findings suggested that liking an


industry led to it being judged as low risk and potentially high return, whiledisliking an industry (such as tobacco) led to judgment of high risk and low return.

It is likely that emotional reaction does not vary significantly across culture, althoughthis is an underresearched area. Emotions do differ in some aspects across cultures, butthe“basic” fundamental emotions are generally considered universal (Mesquita and Haire,2004), further emotions are argued to be primary, often preceding rational thought, sug-gesting their fundamental influence in behavior (Zajonc, 1980; LeDoux, 1996). Giventhe lack of wider research on emotions in finance, and the evidence pointing to a uni-versality of major emotions, it is suggested that emotions in behavioral finance are besttreated as common across cultures. One note for further research though is that there is adifference in cultural influence between broadly experienced emotions, and ego-drivenemotions such as those characterized by the affect heuristic, with ego-driven emotionsbeing culturally mediated (Markus and Kitayama, 1991).This proffers the possibility thatthe affect heuristic, being typically viewed as ego-driven, can fruitfully be investigatedacross countries using cultural mediators to explain cross-country differences in behavior.

3.5. Social DynamicsSocial psychology provides evidence of social dynamics impacting on perception, cogni-tion,attitudes,prejudice,and aggression (among other areas). However,while this suggestsa potential influence on financial decision making, the theories of social psychology donot lend themselves to hypothesis development and testing in finance as easily as thetheories in cognitive and emotional psychology.

Research applying social psychology theories in behavioral finance has concentratedprimarily on the theory of conformity. Conformity is the tendency for individuals ina group to adopt similar attitudes; it has been linked to cultural formation, fashion fads,herd behavior, and a wide variety of social norms (Baron and Byrne, 2004). The theoryof conformity is said to originate with Asch’s (1955; see Baron et al., 1996, for a com-prehensive review) experiments where participants in an experiment were persuaded togive wrong answers to a straightforward question when they had to give their answerafter a number of “pretend” participants all gave the wrong answer.

In behavioral finance studies, links have been drawn between the social interactionof groups of people and their tendency to invest. Shiller and Pound (1989) find that thedecision to buy a particular equity is influenced by someone the investor knows directlytelling them about it. Shiller (2000) also noted the importance of social interaction in theinternet stock pricing bubble driven by herding behavior. Hong et al. (2004) find thatfactors such as church attendance (as a proxy for social interaction) were a determinantof likelihood to invest. While Duflo and Saez (2002) found that employees’ tendency toinvest in a pension scheme seems to depend on social norms in that workplace. Morerecently, Kaustia and Knüpfer (2012) show that the decision to enter financial markets ispartially determined by the past success of peers, further suggestive of herding behavior.


Other research, such as Nofsinger (2005), draws a plausible link between social mood andoverconfidence.

In emerging markets, Ahmed et al. (2010) document evidence of price bubbles innearly all MSCI emerging markets at some point between 1995 and 2005 (start date for acountry dependent on data availability),but do not explore whether the frequency of suchbubbles differs from developed markets. Chang et al. (2000) document a greater pres-ence of herding behavior in the emerging markets of South Korea andTaiwan comparedto developed markets. More recent research by Chiang and Zheng (2010) documentsherding as being more prevalent in the culturally collectivist Asian countries comparedto the relatively individualistic Latin American countries. In other emerging markets(and less-developed markets), Białkowski et al. (2012) find that for Muslim-majoritycountries stock markets tend to rise predictably during the socially (and, of course, reli-giously) important month of Ramadan, perhaps suggestive of herding in these marketsin that period. Chen et al. (2007) further claim that herding should be more prevalentin collectivist cultures in their study of emerging markets and behavioral finance. Thisis suggestive of a greater role for social dynamics in collectivist emerging markets, butclearly the literature is very limited and in need of further expansion.

4. THE FUTURE OF CULTURAL BEHAVIORAL FINANCE RESEARCH INEMERGINGMARKETS

By way of concluding the chapter, we now extract the key findings from our reviewof culture and behavioral finance in emerging markets with a focus on how this mightinform future studies. The findings can be summarized as follows:1. Behavioral finance approaches are generally underapplied in terms of understanding

emerging market financial behavior.This is particularly the case for the cultural clustersoutside of Asia.

2. Culture should be an important factor in the applicability of behavioral finance the-ories to cross-country studies. There are multiple instances of psychological theoriesnot being uniformly present across countries and this appears to be driven by culturaldifferences.There appears to be a tendency in cross-market studies to apply the samebehavioral principle without regard to these cultural differences. At the very least,cultural dimensions should be included as controls in such studies.

3. Given the cultural differences within emerging market countries, these are best notstudied as a uniform group in financial markets’ research.This suggests extension stud-ies to existing emerging markets studies that divide countries by cultural groupings.

4. The area of social dynamics is likely to be of greatest relevance in emerging marketscharacterized by holistic approaches to decision making. Emotional influences onfinancial behavior are best characterized as universal. Cognitive bias influences areconfounded by the opposite influences of culture and relative inexperience.


5. A particularly important cultural dimension is collectivism versus individualism(although the importance of this dimension is partially driven by it being the mostapplied cultural variable). Given that emerging markets have a greater prevalence ofcollectivist countries compared to developed markets, this is of particular relevanceto emerging market studies. One issue is controlling for differences across emergingmarkets in terms of investor sophistication, as lack of investor sophistication mightintroduce cognitive biases through this route. Emerging markets could be differen-tiated along sophistication lines using measures such as extent of foreign investorparticipants in markets, with an expectation being that collectivist countries withsophisticated investors showing a greater influence from culture on the presence ofcognitive biases.

REFERENCESAggarwal, R., Goodell, J.W., 2009a. Markets and institutions in financial intermediation: national character-

istics as determinants. Journal of Banking and Finance 33, 1770–1780.Aggarwal, R., Goodell, J.W., 2009b. Markets versus institutions in developing countries: national attributes

as determinants. Emerging Markets Review 10, 51–66.Aggarwal, R., Kearney, C., Lucey, B., 2012. Gravity and culture in foreign portfolio investment. Journal of

Banking and Finance 36, 525–538.Ahmed, E., Rosser, J., Uppal, J., 2010. Emerging markets and stock market bubbles: nonlinear speculation?

Emerging Markets Finance and Trade 46, 23–40.Alpert, M., Raiffa, H., 1982. A progress report on the training of probability assessors. In: Kahneman,

D., Slovic, P., Tversky, A. (Eds.), Judgement under Uncertainty: Heuristics and Biases. CambridgeUniversity Press, Cambridge.

Antia, M., Lin, J.B., Pantzalis, C., 2007. Cultural distance and valuation of multinational corporations.Journal of Multinational Financial Management 17, 365–383.

Asch, S., 1995. Opinions and social pressure. Scientific American 193, 31–35.Barber, B.M., Odean,T., 2001. Boys will be boys: gender, overconfidence, and common stock investment.

Quarterly Journal of Economics 116, 261–292.Baron, R.A., Byrne, D., 2004. Social Psychology: International Edition. Pearson, Boston.Baron, R.S.,Vandello, U., Brunsman, B., 1996.The forgotten variable in conformity research: impact of task

importance on social influence. Journal of Personality and Social Psychology 71, 915–927.Benartzi, S.,Thaler, R., 1995. Myopic loss aversion and the equity premium puzzle. Quarterly Journal of

Economics 110, 73–92.Biais, B., Weber, M., 2009. Hindsight bias, risk perception, and investment performance. Management

Science 55, 1018–1029.Białkowski, J., Etebari, A., Wisniewski, T., 2012. Fast profits: investor sentiment and stock returns during

Ramadan. Journal of Banking and Finance 36, 835–845.Bordalo, P., Gennaioli, N., Shleifer, A., 2012. Salience theory of choice under risk. Quarterly Journal of

Economics 127, 1243–1285.Breuer, W., Salzmann, A.,2012. National culture and corporate governance. In:Boubaker,S.,Nguyen,B.D.,

Nguyen, D.K. (Eds.), Corporate Governance: Recent Developments and NewTrends. Springer-Verlag,Berlin.

Bushman, R.M., Piotroski, J.D., Smith, A.J., 2004. What determines corporate transparency? Journal ofAccounting Research 42, 207–252.

Cashman, G.D., Deli, D.N., Nardari, F.,Villupuram, S., 2012. Investors do respond to poor mutual fundperformance: evidence from inflows and outflows. Financial Review 47, 719–739.

http://refhub.elsevier.com/B978-0-12-411549-1.00014-4/h0005
























































































































































































































Chan, K., Covrig,V., Ng, L., 2005. What determines the domestic bias and foreign bias? Evidence frommutual fund equity allocations worldwide. Journal of Finance 60, 1495–1534.

Chang, E.C., Cheng, J.W., Khorana, A., 2000. An examination of herd behavior in equity markets: aninternational perspective. Journal of Banking and Finance 24, 1651–1679.

Chang, K., Noorbakhsh, A., 2009. Does national culture affect international corporate cash holdings?Journal of Multinational Financial Management 19, 323–342.

Chen,G.,Kim,K.A.,Nofsinger, J.R.,Rui,O.,2007.Trading performance,disposition effect,overconfidence,representativeness bias, and experience of emerging market investors. Journal of Behavioral DecisionMaking 20, 425–451.

Chiang,T.C., Zheng, D., 2010. An empirical analysis of herd behavior in global stock markets. Journal ofBanking and Finance 34, 1911–1921.

Chiou,W., 2008. Who benefits more from international diversification? Journal of International FinancialMarkets, Institutions and Money 18, 466–482.

Chui, A., Kwok, C., 2009. Cultural practices and life insurance consumption: an international analysisusing GLOBE scores. Journal of Multinational Financial Management 19, 273–290.

Chui, A., Titman, S., Wei, K.C., 2010. Individualism and momentum around the world. Journal ofFinance 65, 361–392.

Coval, J.D.,Moskowitz,T., 1999. Home bias at home: local equity preference in domestic portfolios. Journalof Finance 54, 2045–2073.

Coval, J.D., Moskowitz,T.J., 2001. The geography of investment: informed trading and asset prices. Journalof Political Economy 109, 811–841.

Cutler,D.,Poterba, J.,Summers,L.H.,1990. Speculative dynamics and the role of feedback traders.AmericanEconomic Review 80, 63–68.

Cyert, R., March, J., 1953. A Behavioral Theory of the Firm. Prentice Hall, New Jersey.De Bondt,W.,Thaler, R., 1990. Do security analysts overreact? American Economic Review 80, 52–57.De Bondt,W.,Thaler, R., 1985. Does the stock market overreact? Journal of Finance 40, 793–805.Deshmukh, S., Goel,A.M., Howe, K., 2013. CEO overconfidence and dividend policy. Journal of Financial

Intermediation 22, 440–463.Dowling, M., Lucey, B.M., 2008. Robust global mood influences in equity pricing. Journal of Multinational

Financial Management 18, 145–164.Duflo, E., Saez, E., 2002. Participation and investment decisions in a retirement plan: the influence of

colleagues’ choices. Journal of Public Economics 85, 121–148.Dvorak,T., 2005. Do domestic investors have an information advantage? Evidence from Indonesia. Journal

of Finance 60, 817–839.Edwards,W., 1968. Conservatism in human information processing. In: Kleinmutz, B. (Ed.), Formal Rep-

resentation of Human Judgment. John Wiley and Sons, NewYork.Eriksen, K.W., Kvaloy, O., 2009. Do financial advisors exhibit myopic loss aversion? Financial Markets and

Portfolio Management 24, 159–170.Elliott, C.S., Hayward, D.M., 1998. The expanding definition of framing and its particular impact on eco-

nomic experimentation. Journal of Socio-Economics 27, 229–243.Estrada, J., 2002. Systematic risk in emerging markets:the D-CAPM. Emerging Markets Review 3,365–379.Feng, L., Seasholes, M., 2005. Do Investor sophistication and trading experience eliminate behavioral biases

in financial markets? Review of Finance 9, 305–351.Fidora, M., Fratzscher, M.,Thimann, C., 2007. Home bias in global bond and equity markets: the role of

real exchange rate volatility. Journal of International Money and Finance 26, 631–655.Fidrmuc, J.P., Jacob, M., 2010. Culture, agency costs, and dividends. Journal of Comparative Eco-

nomics 38, 321–339.Finucane, M.L.,Alhakami,A., Slovic, P., Johnson, S.M., 2000. The affect heuristic in judgments of risks and

benefits. Journal of Behavioral Decision Making 13, 1–17.Georgarakos, D., Pasini, G., 2009.Trust, sociability and stock market participation. Netspar Discussion Paper

No 04/2009-015.Goleman, D., 1997. Vital Lies, Simple Truths: The Psychology of Self-Deception. Simon & Schuster,

NewYork.




















































































































































































































































































































Gorodnichenko, Y., Roland, G., 2010. Culture, institutions and the wealth of nations. NBER WorkingPaper No 16368.

Graham, J.R., Harvey, C., Puri, M., 2013. Managerial attitudes and corporate actions. Journal of FinancialEconomics 109, 103–121.

Griffin, D.,Tversky, A., 1992.The weighting of evidence and the determinants of overconfidence. CognitivePsychology 24, 411–435.

Griffin, J.M., Kelly, P.J., Nardari, F., 2010. Do market efficiency measures yield correct inferences? A com-parison of developed and emerging markets. Review of Financial Studies 23, 3225–3277.

Grinblatt, M., Han, B., 2005. Prospect theory, mental accounting, and momentum. Journal of FinancialEconomics 78, 311–339.

Grinblatt, M., Keloharju, M., 2001. How distance, language and culture influence stockholdings and trades.Journal of Finance 56, 1053–1073.

Grinblatt, M., Keloharju, M., 2009. Sensation seeking, overconfidence, and trading activity. Journal ofFinance 64, 549–578.

Heine, S.J., Lehman, D., Markus, H., Kitayama, S., 1999. Is there a universal need for positive self-regard?Psychological Review 106, 766–794.

Hirshleifer, D., 2001. Investor psychology and asset pricing. Journal of Finance 56, 1533–1597.Hirshleifer, D., Low, A., Teoh, S.H., 2012. Are overconfident CEOs better innovators? Journal of

Finance 67, 1457–1498.Hirshleifer, D., Shumway, T., 2003. Good day sunshine: stock returns and the weather. Journal of

Finance 58, 1009–1032.Hofstede, G., 2001. Culture’s Consequences: Comparing Values, Behaviors, Institutions and Organizations

across Nations. Sage,Thousand Oaks.Hogarth,R.M.,Einhorn,H.J.,1992. Order effects in belief updating:the belief-adjustment model. Cognitive

Psychology 24, 1–55.Hong, H., Kubik, J.D., Stein, J.C., 2004. Social interaction and stock-market participation. Journal of

Finance 59, 137–163.House, R., Javidan, M., Hanges, P., Dorfman, P., 2002. Understanding cultures and implicit leadership

theories across the globe: an introduction to project GLOBE. Journal of World Business 37, 3–10.Huang, W., Jiang, F., Liu, Z., Zhang, M., 2011. Agency cost, top executives’ overconfidence, and invest-

ment-cash flow sensitivity—evidence from listed companies in China. Pacific-Basin Finance Jour-nal 19, 261–277.

Huberman, G., 2001. Familiarity breeds investment. Review of Financial Studies 14, 659–680.Hwang, S., Satchell, S.E., 2010. How loss averse are investors in financial markets? Journal of Banking and

Finance 34, 2425–2438.Ikenberry, D.L., Ramnath, S., 2002. Underreaction to self-selected news events: the case of stock splits.

Review of Financial Studies 15, 489–526.Inglehart,R.,Welzel,C.,2005. Modernization,Cultural Change,and Democracy:The Human Development

Sequence. Cambridge University Press, Cambridge.Isenberg, D., 1986. Group polarization: a critical review and meta-analysis. Journal of Personality and Social

Psychology 50, 1141–1151.Ji, L., Zhang, Z., Guo,T., 2008. To buy or to sell: cultural differences in stock market decisions based on

price trends. Journal of Behavioral Decision Making 21, 399–413.Jiatao, L., Harrison, J.R., 2008. Corporate governance and national culture: a multi-country study.

Corporate Governance 8, 607–621.Kahneman, D., Slovic, P., Tversky, A., 1982. Judgement Under Uncertainty: Heuristics and Biases.

Cambridge University Press, Cambridge.Kahneman, D., Tversky, A., 1973. On the psychology of prediction. Psychological Review 80, 237–251.Kahneman, D., Tversky, A., 1979. Prospect theory: an analysis of decision under risk. Economet-

rica 47, 263–291.Kamstra, M.J., Kramer, L., Levi, M., 2003. Winter blues: A SAD stock market cycle. American Economic

Review 93, 324–343.Kaustia, M., Knüpfer, S., 2012. Peer performance and stock market entry. Journal of Financial Eco-

nomics 104, 321–338.























































































































































































































































































































Kirkman, B.L., Lowe, K.B., Gibson, C.B., 2006. A quarter century of culture’s consequences: a review ofempirical research incorporating Hofstede’s cultural values framework. Journal of International BusinessStudies 37, 285–320.

Kruger, J., 1999. Lake Wobegon Be gone! The ‘below-average effect’ and the egocentric nature of com-parative ability judgments. Journal of Personality and Social Psychology 77, 221–232.

Langer, E., Roth, J., 1975. Heads I win, tails it’s chance: the illusion of control as a function of the sequenceof outcomes in a purely chance game. Journal of Personality and Social Psychology 32, 951–955.

LeDoux, J.E., 1996. The Emotional Brain. Simon and Schuster, NewYork.Loewenstein, G., Weber, E., Hsee, C.K., Welch, N., 2001. Risk as feelings. Psychological Bul-

letin 127, 267–286.Lord, C., Ross, L., Lepper, M., 1979. Biased assimilation and attitude polarization: the effects of prior theo-

ries on subsequently considered evidence. Journal of Personality and Social Psychology 37, 2098–2109.Lucey, B.M., Dowling, M., 2005. The role of feelings in investor decision-making. Journal of Economic

Surveys 19, 211–237.MacGregor, D.G., Slovic, P., Dreman, D., Berry, M., 2000. Imagery, affect, and financial judgment. Journal

of Psychology and Financial Markets 1, 104–110.Maddox,J.,Wilson,E.,Quintan,A.,Turner,J.,Bowker,J.,1984. Genes,minds and culture. Zygon 19,213–232.Malmendier, U., Tate, G., 2005. CEO overconfidence and corporate investment. Journal of Finance

60, 2661–2700.Markus,H.R.,Kitayama, S., 1991. Culture and the self: implications for cognition, emotion, and motivation.

Psychological review 98, 224–253.Massa, M., Simonov, A., 2006. Hedging, familiarity and portfolio choice. Review of Financial Stud-

ies 19, 633–685.Mesquita, B., Haire,A., 2004. Emotion and culture. Encyclopedia of Applied Psychology, 731–737.Morse,A., Shive, S., 2011. Patriotism in your portfolio. Journal of Financial Markets 14, 411–440.Mulder, M., 1977. The Daily Power Game. Martinus Nijhoff,Amsterdam.O’Grady, S., Lane, H.W., 1996. The psychic distance paradox. Journal of International Business Stud-

ies 27, 309–333.Nicolosi, G., Peng, L., Zhu, N., 2009. Do individual investors learn from their trading experience? Journal

of Financial Markets 12, 317–336.Nisbett, R.E., Peng, K., Choi, I., Norenzayan, A., 2001. Culture and systems of thought: holistic versus

analytic cognition. Psychological Review 108, 291–310.Nofsinger, J.R., 2005. Social mood and financial economics. Journal of Behavioral Finance 6, 144–160.Rabin, M.,Vayanos, D., 2010. The Gambler’s and hot-hand fallacies: theory and applications. Review of

Economic Studies 77, 730–778.Ramírez,A.,Tadesse, S., 2009. Corporate cash holdings, uncertainty avoidance, and the multinationality of

firms. International Business Review 18, 387–403.Schuler, R.S., Rogovsky, N., 1998. Understanding compensation practice variations across firms:the impact

of national culture. Journal of International Business Studies 29, 159–177.Schwarz,N.,Clore,G.L.,1983. Mood,misattribution,and judgments of well-being:informative and directive

functions of affective states. Journal of Personality and Social Psychology 45, 513–523.Schwarz, N., Clore, G.L., 2003. Mood as information: 20 years later. Psychological Inquiry 14, 296–303.Schwartz, S.H., Sagiv, L., 1995. Identifying culture-specifics in the content and structure of values. Journal

of Cross-Cultural Psychology 26, 92–116.Seasholes, M., Zhu, N., 2010. Individual investors and local bias. Journal of Finance 65, 1987–2010.Shao, L., Kwok, C., Guedhami, O., 2009. National culture and dividend policy. Journal of International

Business Studies 41, 1391–1414.Shiller, R.J., 2000. Conversation, information, and herd behavior. American Economic Review

85, 181–185.Shiller, R.J., Pound, J., 1989. Survey evidence on diffusion of interest and information among investors.

Journal of Economic Behavior and Organization 12 (1), Elsevier.Slovic, P., Finucane, M.L., Peters, E., MacGregor, D.G., 2002. The affect heuristic. In: Gilovich,T., Griffin,

D., Kahneman, D. (Eds.), Heuristics and Biases: The Psychology of Intuitive Judgment. CambridgeUniversity Press, Cambridge.


































































































































































































































































































































































Statman, M., Thorley, S., Vorkink, K., 2006. Investor overconfidence and trading volume. Review ofFinancial Studies 19, 1531–1565.

Taras,V., Rowney, J., Steel, P., 2009. Half a century of measuring culture: review of approaches, challenges,and limitations based on the analysis of 121 instruments for quantifying culture. Journal of InternationalManagement 15, 357–373.

Tversky, A., Kahneman, D., 1974. Judgement under uncertainty: heuristics and biases. Science185, 1124–1131.

Tversky, A., Kahneman, D., 1981. The framing of decisions and the psychology of choice. Science211, 453–458.

Van der Hart, J., Slagter, E.,Van Dijk, D., 2003. Stock selection strategies in emerging markets. Journal ofEmpirical Finance 10, 105–132.

Van Gorp, B., 2007.The constructionist approach to framing: bringing culture back in. Journal of Commu-nication 57, 60–78.

Warnock, F.E., 2002. Home bias and high turnover reconsidered. Journal of International Money andFinance 21, 795–805.

Wilke, A., Barrett, H.C., 2009. The hot hand phenomenon as a cognitive adaptation to clumped resources.Evolution and Human Behavior 30, 161–169.

Wright,W.F., Bower, G.H., 1992. Mood effects on subjective probability assessment. Organizational Behav-ior and Human Decision Processes 52, 276–291.

Yama, H., Manktelow, K., Mercier, H., Henst, J.B.V., Soo Do, K., Kawasaki, Y., Adachi, K., 2010. Across-cultural study of hindsight bias and conditional probabilistic reasoning. Thinking and Reason-ing 16, 346–371.

Zajonc, R.B., 1980. Feeling and thinking: preferences need no inference. American Psychologist35, 151–175.




































































































































emerging markets and the global economy || cultural behavioral finance in emerging markets

Documents