It seems quite natural to assume that domestic residents know more about local investment opportunities than foreigners do. This accords with conventional wisdom regarding international capital flows. Unfortunately, explanations based on asymmetric information also have their drawbacks. Based on the strong regional component of capital flows, Froot, et al. Also, while it is natural to assume domestic residents know more about local conditions, the exact nature and source of this asymmetry are left unspecified and unexplained.
Home bias is a pervasive phenomenon, which seems to go beyond knowledge of investment opportunities.
Instead, there appears to be a more fundamental factor involved. For example, the domestic portfolios of U.S. money managers are biased toward firms that are located near their offices. That is, geographic distance helps to explain the magnitude of bilateral capital flows. This is surprising in an age of computer networks and telephones. He argues that people simply prefer to deal with familiar situations.