Investors’ Risk Perceptions of Structured Financial Products with Worst-of Payout Characteristics

Kunz, Alexis H.; Messner, Claude; Wallmeier, Martin (2017). Investors’ Risk Perceptions of Structured Financial Products with Worst-of Payout Characteristics. Journal of behavioral and experimental finance, 15(15), pp. 66-73. Elsevier 10.1016/j.jbef.2017.07.005

[img] Text
1-s2.0-S2214635017300473-main.pdf - Published Version
Restricted to registered users only
Available under License Publisher holds Copyright.

Download (578kB) | Request a copy

We conduct an experiment to investigate how investors assess the risk of Reverse Convertibles that link the payout to the worst performing stock of a pool of underlying assets. Based on theory from psychology, we conjecture that investors’ risk perception can be systematically biased downwards via the strategic selection and composition of the underlying assets. We predict and find that adding relatively safe assets to a risky underlying asset decreases perceived investment risk despite the fact that the risk always strictly increases. Investment experience and expertise alleviate but do not eliminate the bias. Our findings contribute to the understanding of the puz-zling success of structured products with worst-of payout characteristics. They also come with important implications for investor protection in a market in which financial institutions can tailor financial products to exploit behavioral biases of non-professional investors.

Item Type:

Journal Article (Original Article)

Division/Institute:

03 Faculty of Business, Economics and Social Sciences > Department of Business Management > Institute of Innovation Management > Consumer Behavior
03 Faculty of Business, Economics and Social Sciences > Department of Business Management > Institute for Accounting and Controlling > Financial Accounting

UniBE Contributor:

Kunz, Alexis H. and Messner, Claude Mathias

Subjects:

600 Technology > 650 Management & public relations
300 Social sciences, sociology & anthropology > 330 Economics

ISSN:

2214-6350

Publisher:

Elsevier

Language:

English

Submitter:

Alexis H. Kunz

Date Deposited:

08 Nov 2017 08:46

Last Modified:

19 Feb 2019 11:39

Publisher DOI:

10.1016/j.jbef.2017.07.005

Uncontrolled Keywords:

Structured products; Risk perception; Reverse convertible; Behavioral biases; Investor protection

BORIS DOI:

10.7892/boris.105317

URI:

https://boris.unibe.ch/id/eprint/105317

Actions (login required)

Edit item Edit item
Provide Feedback