Narrow Results

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.

Dynamically inconsistent decision makers have to decide, implicitly or explicitly, what to do about their dynamic inconsistency. Economic theorists have identified three possible responses—to act naively (thus ignoring the dynamic inconsistency), to act resolutely (not letting their inconsistency affect their behaviour) or to act sophisticatedly (hence taking into account their inconsistency). We use data from a unique experiment (which observes both decisions and evaluations) in order to distinguish these three possibilities. We find that the majority of subjects are either naive or resolute (with slightly more being naive) but very few are sophisticated. These results have important implications for predicting the behaviour of people in dynamic situations.

We report on an experiment which enables us to infer how far people plan ahead when taking decisions in a dynamic risky context. Just over half of the subjects plan fully, while the rest do not plan ahead at all.