CHAPTER 3Cultural Differences in Investors' Behavior

One branch of behavioral finance has developed in the realm of cultural research. It shows how behavior patterns differ in the cultures familiar to us. Cultural finance provides an essential foundation for globally active banks, and for a good reason. Despite advancing globalization, we can still identify some significant cultural differences around the world. Around 5,000 languages are spoken worldwide, eating habits vary from region to region, and there are some differences in our social conventions that we should know before crossing the globe. However, traditional finance barely acknowledges international cultural diversity. It is based on the premise that money is the great equalizer. Nowadays, investors can trade (nearly) any security they want just by pressing a few computer keys.

Traditional finance also dictates that in the end, we all want the same thing: to achieve high returns without taking on too much risk. For some 20 years, researchers in behavioral finance have been trying to determine whether finance is indeed subject to cultural differences. Even if we assume that investors around the globe are focused on the return/risk trade‐off, researchers believe that culture can influence investors differently in terms of the type of investments, investment time horizons, and risk aversion. Ultimately, behavioral finance shows that while there is only one way to act rationally, there are many ways of acting irrationally. ...

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