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The valuation “by-tranche” of composite investment instruments

Author

Listed:
  • Doron Sonsino

    () (COMAS-College of Management Academic Studies)

  • Mosi Rosenboim

    (Ben-Gurion University of the Negev)

  • Tal Shavit

    (COMAS-College of Management Academic Studies)

Abstract

The return on composite investment instruments takes the form of weighted-average, derived from two economic indicators or more. Three experiments illustrate that prospective investors tend to valuate composites “by-tranche”, consistently violating the premise of reduction. Valuation-by-tranche shows for uncertain and risky composites and reflects in allocation problems and binary choice. The willingness to invest still strongly increases when one tranche hedges against the other, suggesting that reduced-form considerations may interfere with the inclination to value by part. A hybrid model where investors weight the values of tranches, but also respond to the reduced-form, approximates the data most accurately.

Suggested Citation

  • Doron Sonsino & Mosi Rosenboim & Tal Shavit, 2017. "The valuation “by-tranche” of composite investment instruments," Theory and Decision, Springer, vol. 82(3), pages 353-393, March.
  • Handle: RePEc:kap:theord:v:82:y:2017:i:3:d:10.1007_s11238-016-9567-7
    DOI: 10.1007/s11238-016-9567-7
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    Cited by:

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    More about this item

    Keywords

    Composite investments; Frame invariance; Correlation neglect; Limited loss aversion; Increasing marginal disutility of loss;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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