Chapter 5: Investor Sophistication and the Effect of Behavioral Biases in Structured Products Investment

We examine the effects of behavioral biases among professional investors using the case of structured product (SP) investments. We outline key features embedded in SP and associate each with a specific behavioral bias. Our findings reveal that, to varying degrees, the biases examined affect professional investors. As the findings show that even professional investors are not immune to biases, we try to ascertain whether there are certain personal characteristics that influence the magnitude of bias within this group of professionals. Using logit, probit, and linear probability models, we show that the behavioral patterns examined are so deeply rooted in human behavior that they are difficult to overcome, and that this holds true with regard to any of the personal characteristics analyzed. By demonstrating these behavioral biases’ impact on investors, our results lend support to applying specific regulation to SP investments, aimed at improving investor protection. The regulation should apply to both professional and non-professional investors.