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

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.