Structured products (SP) are synthetic investment instruments specially designed to meet specific needs that cannot be met by acquiring standard financial instruments available in the markets. We argue that many SP 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 SP may be warranted to improve investor protection. We offer a regulation that would compel issuers to reveal the effective fees they charge investors. In disclosing the effective fees, investors will be able to improve their decisions and will be able to evaluate the costs of their behavioral biases.
|Original language||American English|
|Title of host publication||BEHAVIORAL FINANCE|
|Subtitle of host publication||WHERE DO INVESTORS’ BIASES COME FROM?|
|Publisher||World Scientific Publishing Co.|
|Number of pages||33|
|State||Published - 1 Jan 2016|
Bibliographical notePublisher Copyright:
© 2017 by World Scientific Publishing Co. Pte. Ltd.
- Behavioral finance
- Retail investors
- Securities regulation
- Structured products