Retail banking and behavioral financial engineering: The case of structured products [An article from: Journal of Banking and Finance]

This digital document is a journal article from Journal of Banking and Finance, published by Elsevier in 2007. The article is delivered in HTML format and is available in your Amazon.com Media Library immediately after purchase. You can view it with any web browser.

Description:
We apply cumulative prospect theory and hedonic framing to evaluate discount reverse convertibles (DRCs) and reverse convertible bonds (RCBs) as important examples of structured products from a boundedly rational investor's point of view. While common expected utility theory would also conclude that DRCs and RCBs are of interest to investors with moderate return expectations and underestimated stock return volatility, that theory would overestimate the market success of DRCs and underestimate that of RCBs in comparison to a situation with bounded rationality. Hedonic framing and relatively low subjectively felt competence levels of investors are decisive for the demand for RCBs.