Can Security Design Foster Household Risk-Taking?
188 Pages Posted: 2 Nov 2019 Last revised: 26 Feb 2022
Date Written: January 13, 2022
This paper shows that securities with non-linear payoff designs can foster household risk-taking. We demonstrate this effect by exploiting the introduction of capital guarantee products in Sweden between 2002 and 2007. Their fast and broad adoption is associated with an increase in expected financial portfolio returns. The effect is especially strong for households with low risk appetite ex ante. These empirical facts are consistent with a life-cycle model in which households have pessimistic beliefs or preferences combining loss aversion and narrow framing. Our results illustrate how security design can mitigate behavioral biases to increase mean household portfolio returns.
Keywords: Behavioral biases, capital guarantee product, household finance, risk-taking, security design.
JEL Classification: I22, G1, D18, D12.
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