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Options and structured products in behavioral portfolios

  • Das, Sanjiv R.
  • Statman, Meir

Options and structured products have no roles in mean–variance portfolios, but they have roles in behavioral portfolios. Behavioral portfolios are composed of mental account sub-portfolios, each associated with a goal, such as retirement income or bequest. Investors optimize each mental account by finding the assets and asset allocation that maximizes the expected return of each mental account sub-portfolio subject to the condition that the probability of failing to reach a preset threshold aspiration level not exceed a preset probability. Put options are useful in ‘downside protection’ mental accounts whose goal is avoiding poverty, whereas call options are useful in ‘upside potential’ mental accounts whose goal is a shot at riches. We also explore the roles in behavioral portfolios of option collars, capital guaranteed notes, and barrier range notes.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 37 (2013)
Issue (Month): 1 ()
Pages: 137-153

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Handle: RePEc:eee:dyncon:v:37:y:2013:i:1:p:137-153
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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