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Individuals Investment in Financial Structured Products from Rational and Behavioral Choice Perspectives

In: Behavioral Finance WHERE DO INVESTORS' BIASES COME FROM?

Author

Listed:
  • Moran Ofir
  • Zvi Wiener

Abstract

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 th se 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.

Suggested Citation

  • Moran Ofir & Zvi Wiener, 2016. "Individuals Investment in Financial Structured Products from Rational and Behavioral Choice Perspectives," World Scientific Book Chapters, in: Itzhak Venezia (ed.), Behavioral Finance WHERE DO INVESTORS' BIASES COME FROM?, chapter 2, pages 33-65, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789813100091_0002
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    Citations

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    Cited by:

    1. Samuel Ribeiro-Navarrete & Juan Piñeiro-Chousa & M. Ángeles López-Cabarcos & Daniel Palacios-Marqués, 2022. "Crowdlending: mapping the core literature and research frontiers," Review of Managerial Science, Springer, vol. 16(8), pages 2381-2411, November.
    2. Abreu, Margarida, 2019. "How biased is the behavior of the individual investor in warrants?," Research in International Business and Finance, Elsevier, vol. 47(C), pages 139-149.
    3. Jiang, Jiajun & Liu, Yu-Jane & Lu, Ruichang, 2020. "Social heterogeneity and local bias in peer-to-peer lending – evidence from China," Journal of Comparative Economics, Elsevier, vol. 48(2), pages 302-324.
    4. Margarida Abreu & Victor Mendes, 2018. "Do Individual Investors Trade Differently in Different Markets?," Working Papers Department of Economics 2018/01, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    5. Mohamed, Hazik, 2018. "Macro and Micro-level Indicators of Maqāṣid al- Sharī‘ah in Socio-Economic Development Policy and its Governing Framework," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 25, pages 19-44.

    More about this item

    Keywords

    Behavioral Finance; Rationality; Experimental Finance; Reference Points; Professionals; Gender; Culture and Finance; Equity Premium;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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