Can Security Design Foster Household Risk-Taking?

Laurent Calvet, Célérier, Claire and Boris Vallee

No 14955, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper shows that securities with a non-linear payoff design can foster household risk-taking. We demonstrate this effect empirically by exploiting the introduction of capital guarantee products in Sweden from 2002 to 2007. The fast and broad adoption of these products is associated with an increase in expected financial portfolio returns, which is especially strong for households with a low risk appetite ex ante. We explore possible economic explanations by developing a life-cycle model of consumption-portfolio decisions. The capital guarantee substantially increases risk-taking by households with pessimistic beliefs or preferences combining loss aversion and narrow framing. The welfare gains from financial innovation are stronger for households that are less willing to take risk ex ante. Our results illustrate how security design can mitigate behavioral biases and enhance economic well-being.

Keywords: Security design; Household finance; Capital guarantee product; Behavioral biases; Risk-taking (search for similar items in EconPapers)
JEL-codes: D12 D18 G1 I22 (search for similar items in EconPapers)
Date: 2020-06
New Economics Papers: this item is included in nep-upt
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Citations: View citations in EconPapers (9)

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