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Options and structured products in behavioral portfolios

Sanjiv Das () and Meir Statman

Journal of Economic Dynamics and Control, 2013, vol. 37, issue 1, 137-153

Abstract: Options and structured products have no roles in mean–variance portfolios, but they have roles in behavioral portfolios. Behavioral portfolios are composed of mental account sub-portfolios, each associated with a goal, such as retirement income or bequest. Investors optimize each mental account by finding the assets and asset allocation that maximizes the expected return of each mental account sub-portfolio subject to the condition that the probability of failing to reach a preset threshold aspiration level not exceed a preset probability. Put options are useful in ‘downside protection’ mental accounts whose goal is avoiding poverty, whereas call options are useful in ‘upside potential’ mental accounts whose goal is a shot at riches. We also explore the roles in behavioral portfolios of option collars, capital guaranteed notes, and barrier range notes.

Keywords: Behavioral portfolios; Options; Structured products (search for similar items in EconPapers)
JEL-codes: G2 G11 (search for similar items in EconPapers)
Date: 2013
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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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Handle: RePEc:eee:dyncon:v:37:y:2013:i:1:p:137-153