Investment in Financial Structured Products from Rational and Behavioral Choice Perspectives

Abstract

Analyzing typical structure product (SP) by figuring out the underlying assets and pricing them, demonstrates a transfer of wealth from the investors to the issuers. We argue that many SPs currently available to retail investors are designed to exploit several behavioral biases including: loss aversion, the disposition effects, herd behavior, the ostrich effect and the hindsight bias. We perform an experiment that examines investor decision-making in relation to SP investments. Our findings demonstrate that investors tend to be affected by these behavioral biases, which favor SP investments. Accordingly, regulation dealing specifically with SPs may be warranted to improve investor protection.

Keywords: structured products, behavioral finance, retail investors, securities regulation

JEL Classification: D19, G18, K22