Narrow Results

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.

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.

As the international financial marketplace has evolved to encompass a wide range of tradable asset classes, tensions between classical investment theory, trading practices, and government regulations have grown. This chapter will map the history of modern trading, taking a close look at the products, venues, and technological underpinnings of today's futures markets. It will focus on high-frequency trading, assessing the varying roles and needs of investment elites, market makers, regulators, and the public in maintaining clean and orderly market mechanisms. Key questions include the role of market participants, hedgers, speculators, and arbitrageurs in high-frequency trading and price discovery, their influence over fluctuations in financial stability, and the implications for the financial system as a whole. The chapter will conclude with a look ahead in terms of the regulatory activities that will shape these mechanisms in the years to come, with comments on market microstructure, the provision of liquidity, and innovation in futures markets around the world.