TY - JOUR T1 - Why Do Investors Buy Structured Products? <em>A Behavioral Finance Explanation</em> JF - The Journal of Wealth Management SP - 51 LP - 60 DO - 10.3905/jwm.2012.14.4.051 VL - 14 IS - 4 AU - Dominik Helberger Y1 - 2012/01/31 UR - https://pm-research.com/content/14/4/51.abstract N2 - People trade for both cognitive and emotional reasons, and the high demand for structured products raises many questions. For example, the costs in the form of lost dividend payments (if the hedge position is lost, or the bonus level is exceeded) and possible expensive secondary markets are examples of such questions. A better understanding of the reasons for the demand (such as underlying preferences) can help to reduce the number of issues and decrease costs, which can increase the efficiency of the certificate market. Overall, the author provides both theoretical and empirical evidence to clarify the demand for structured products based on the findings of prospect theory. The value function, in particular, from prospect theory provides plausible explanations for why structured products are attractive to investors, as shown with the example of bonus certificates. For further research, other explanations based on behavioral finance could be analyzed, such as mental accounting or myopic loss aversion. Using macro data, the author shows that bonus certificates are frequently demanded, as expected based on the theoretical analysis. But analyzing aggregated data to test theoretical hypotheses in behavioral finance is always problematic. It would be interesting to run some further experimental procedures to test the investors’ decision-making process.TOPICS: Fixed income and structured finance, in portfolio management ER -