Investing in the Unknown and the Unknowable—Behavioral Finance in Frontier Markets
While human nature may be a constant, investors have broadened their horizons, investing in emerging markets and, most recently, the frontier markets (those markets not in the popular emerging market indexes). As they have done so, investors have run head on into cultural differences, behavioral differences, and biases that present challenges from many perspectives. Behavioral finance has explored many aspects of investors' behavior, and we can apply this groundwork to understanding frontier markets from the perspective of foreign, professional and local investors. Across countries, there are significant differences in behavior based on the familiarity bias, trust, loss aversion, and risk preference. Considering these behavioral elements can lead to some insights that investors should keep in mind when investing in frontier markets.