-10- 2,Expert and Reliance Effects.An expert effect (i.e.,overemphasizing the field you understand best;Heath and Tversky,1990)could explain the lack of international diversification even by professionals who specialize in asset classes. Complementing the expert effect in financial markets is a reliance effect:decision makers often rely on the advice of individuals with expert knowledge,even though using the expert is costly and there is no proof that such reliance will produce better outcomes.Thus, despite meager evidence that experts can outperform the stock market,investors hesitate to rely on their own judgment in selecting a portfolio.Instead they pay experts handsomely for managing their funds.The extraordinary success of the mutual fund industry illustrates the reliance phenomenon at work.Despite a modest overall performance record,consistent with efficient marketsis,the mutual fund industry has grown spectacularly since the early 1970s;by 1988,there were more mutual funds (over 2700)than there were stocks on the NYSE. 3.Status Quo Bias.Investors tend to stick with strategies because of a reluctance to depart from the status quo,a widely observed human tendency (Samuelson and Zeckhauser, 1988).Status quo bias may be promoted by reliance on rules of thumb,which is an outgrowth of bounded rationality.Reinforced by expert effects,status quo bias may deter individuals from investing in areas beyond their expertise.Most U.S.investors,for example,are reluctant to hold significant positions in non-U.S.securities despite prospective gains in diversification.Status quo bias is also stimulated by concerns about regret,which tend to make errors of omission(failing to sell a stock that later goes down)much less serious than errors of commission(selling a stock only to see it perform spectacularly).19 A period of learning how to function in changing financial markets-a pattern not acknowledged in conventional finance theory-could also explain status quo bias.20 4.Illusions,Framing,and Data Packaging.Since U.S.investors deal mainly in dollar transactions,they may not pay enough attention to exchange rate fluctuations and their implied 1Over the past five years.ony4rof the1100 funds folkwed by Schabacker Invesment Management have bettered the S&P 500's annualized retum. 19Status quo bias would be ratinly reinforced by transactions costs incurred in getting out of a position (brokerage fees,exit charges,and taxes). 20Most United States investors,for example.my not know how to go about investing in Japan,though that market is now open.Indeed,the economic costs of investing directly on the Tokyo exchange are small.Thus if the Japanese stocks that issue ADRs in the United States,or the U.S.stocks that are traded on the Tokyo Exchange, tur out to have much higher levels of cross ownership.that might he considered evidence for a leaming factor contributing to status quo bias.However,the causality may run the other way:ADRs may be made available specifically for those stocks that are desired by foreign investors