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The Investor in Structured Retail Products: Marketing Driven or Gambling Oriented?

Victor Mendes () and Margarida Abreu ()

No 6621, EcoMod2014 from EcoMod

Abstract: Structured retail products (SRP) are one of the most visible faces of financial innovation and are becoming increasingly popular amongst retail investors. However, there is strong consensus that retail investors’ preference for structured products is difficult to explain using the standard rational theory, those products being in general sold at a significant premium. Studying the actual trading behavior of individual investors we provide evidence consistent with the view that SRP likely offer value to some informed investors compared to other products, that product complexity is a way to complete markets and that SRP allow investors to access segments otherwise not available to them. Nonetheless, our results also suggest that the increasing popularity of SRP is deeply related to investors’ behavioral biases, particularly overconfidence and gambling. Moreover, results also show that SRP trading activity cannot be dissociated from aggressive marketing practices. The study is structured as follows: The next section describes the database used. The third section traces the socio-demographic profile of investors in SRP, making a comparison with equity investors and the general Portuguese population. In section 4 alternative models are estimated to help define the profile of investors in SRP and evaluate the influence of behavioral traits in this characterization. In the last section some final conclusions are drawn. We start out documenting that investors in SRP are different than investors in other instruments. We then test the impact of financial literacy on the investment in SRP and conclude that more knowledgeable and sophisticated investors are more likely to invest in SRP. This is consistent with the idea that if product complexity is a way to complete markets, then more knowledgeable and sophisticated retail investors will be offered (and will invest in) more complex structured products. We also conclude that overconfident investors participate (and trade) more in the structured retail product market, and that the contact between the product distributor and the investor is most relevant. Therefore, marketing is a strong determinant of the investment is SRP thus providing a rationale for overpricing. Finally, our results allow us to conclude that gambling may justify investors’ irrationality when they opt for SRP.

Keywords: Portugal; Finance; Miscellaneous (search for similar items in EconPapers)
Date: 2014-07-03
New Economics Papers: this item is included in nep-mkt
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Working Paper: The Investor in Structured Retail Products: Marketing Driven or Gambling Oriented? (2017) Downloads
Working Paper: The Investor in Structured Retail Products: Marketing Driven or Gambling Oriented? (2017) Downloads
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