Salient Attributes and Household Demand for Security Designs

Fisher College of Business Working Paper No. 2023-03-007

Charles A. Dice Center Working Paper No. 2023-07

90 Pages Posted: 7 Apr 2023 Last revised: 14 Mar 2024

See all articles by Petra Vokata

Petra Vokata

Ohio State University (OSU) - Department of Finance; Center for Economic and Policy Research

Date Written: April 4, 2023

Abstract

Can salient attributes distort high-stakes investment decisions? Using a rich dataset of complex retail securities, I show banks add non-standard (fine-print) conditions to artificially increase advertised rates of headline return and downside protection—a phenomenon I term "enhancement." Enhancement increases headline returns by 11 percentage points, on average, but does not increase realized returns. Flexibly controlling for all other product attributes and using shocks to structuring costs of enhancement for identification, I find demand is highly elastic to enhancement. Investors are willing to pay 35–60 basis points for one percentage point of enhancement, which I show is inconsistent with rational portfolio choice. I then explore salience as the primary psychological mechanism that is consistent with my results. In total, I estimate investors lost $1.6 billion due to this salience distortion.

Keywords: Salience, Behavioral Inattention, Shrouding, Security Design, Household Finance, Reaching for Yield

JEL Classification: D18, G11, G23, G40, G50

Suggested Citation

Vokata, Petra, Salient Attributes and Household Demand for Security Designs (April 4, 2023). Fisher College of Business Working Paper No. 2023-03-007, Charles A. Dice Center Working Paper No. 2023-07, Available at SSRN: https://ssrn.com/abstract=4410062 or http://dx.doi.org/10.2139/ssrn.4410062

Petra Vokata (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Center for Economic and Policy Research ( email )

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