Can Security Design Foster Household Risk-Taking?

188 Pages Posted: 2 Nov 2019 Last revised: 26 Feb 2022

See all articles by Laurent E. Calvet

Laurent E. Calvet

EDHEC Business School - Department of Economics & Finance; CEPR

Claire Celerier

University of Toronto - Rotman School of Management

Paolo Sodini

Stockholm School of Economics - Department of Finance; Swedish House of Finance

Boris Vallee

Harvard Business School - Finance Unit

Multiple version iconThere are 2 versions of this paper

Date Written: January 13, 2022

Abstract

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.

Suggested Citation

Calvet, Laurent E. and Celerier, Claire and Sodini, Paolo and Vallee, Boris, Can Security Design Foster Household Risk-Taking? (January 13, 2022). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3474645 or http://dx.doi.org/10.2139/ssrn.3474645

Laurent E. Calvet

EDHEC Business School - Department of Economics & Finance ( email )

France

CEPR ( email )

33 Great Sutton Street
London, EC1V 0DX
United Kingdom

Claire Celerier (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Paolo Sodini

Stockholm School of Economics - Department of Finance ( email )

Sveavagen 65, Box 6501
SE-113 83 Stockholm
Sweden
46 8 7369165 (Phone)
46 8 312327 (Fax)

HOME PAGE: http://www.hhs.se/secfi/People/Faculty/Finpso/finp

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Boris Vallee

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
159
Abstract Views
1,168
rank
260,682
PlumX Metrics