The Valuation of Composite Investment Instruments

60 Pages Posted: 21 Mar 2015 Last revised: 12 Jan 2018

See all articles by Doron Sonsino

Doron Sonsino

Ben-Gurion University of the Negev; Center for Academic Studies

Mosi Rosenboim

Ben-Gurion University of the Negev

Tal Shavit

College of Management (Israel)

Date Written: March 19, 2015

Abstract

The return on composite investment instruments takes the form of weighted-average, derived from the performance of at least two economic indicators. Three allocation experiments illustrate that prospective investors tend to valuate composites "by-tranche", consistently violating the rational premise of reduction. Valuation-by-tranche shows for uncertain and risky composites, and reflects in allocation problems and binary choice. The willingness to invest in a given composite still strongly increases when one tranche hedges against the other, suggesting that reduced-form considerations might interfere with the inclination to value components separately. A hybrid model where investors weight the values of underlying tranches, but also respond to the reduced-form prospect, approximates the data most accurately. Personal tendency to valuate composites by-tranche negatively correlates with choice consistency, suggesting that component-level processing might bias investment decision and open space for profitable composite engineering.

Keywords: Composite investment; reduction; prospect theory; restricted loss aversion; increasing marginal disutility of loss

JEL Classification: D81; D14; C91

Suggested Citation

Sonsino, Doron and Rosenboim, Mosi and Shavit, Tal, The Valuation of Composite Investment Instruments (March 19, 2015). Available at SSRN: https://ssrn.com/abstract=2580973 or http://dx.doi.org/10.2139/ssrn.2580973

Doron Sonsino (Contact Author)

Ben-Gurion University of the Negev ( email )

1 Ben-Gurion Blvd
Beer-Sheba 84105, 84105
Israel

Center for Academic Studies ( email )

Ha-Yotsrim 2
Or Yehuda, 6021816
Israel

Mosi Rosenboim

Ben-Gurion University of the Negev ( email )

1 Ben-Gurion Blvd
Beer-Sheva, 84105
Israel

Tal Shavit

College of Management (Israel) ( email )

7 Rabin Blvd.
Rishon Lezion
Rishon Lezion, 75190
Israel

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