Martin R.W. Hiebl, Rainer Baule, Andreas Dutzi, Volker Stein and Arnd Wiedemann
Rainer Baule and Patrick Muenchhalfen
The authors evaluate the preferences of retail investors with regard to the investment in structured financial products. The purpose of the paper is an analysis of the relative…
Abstract
Purpose
The authors evaluate the preferences of retail investors with regard to the investment in structured financial products. The purpose of the paper is an analysis of the relative importance of key product attributes namely the issuing bank, the product structure, the associated costs and the disclosed risk.
Design/methodology/approach
The authors conduct a choice-based conjoint analysis, based on an online experiment. Participants judge their preferences for products which are presented by shortened key information documents according to the requirements of EU regulation.
Findings
Investors consider the costs and the product structure to be most important, whereas the issuer and information on risk are of less interest. Their preferences depend on their (self-evaluated) expertise: while inexperienced retail investors concentrate on costs, experienced investors pay more attention to the product structure.
Research limitations/implications
The study is limited to a subsegment of the market, the discount certificates. For these products, issuing banks gain insight into the attractiveness of their products. Furthermore, the study carries implications for regulators: since investors emphasize the costs in their decisions, an unbiased disclosure of costs should be enforced.
Originality/value
While the recent literature has studied preferences for the investment in mutual funds, this is the first paper which directly analyzes the drivers of an investment in structured retail products.
Details
Keywords
Philip Blonski and Simon Christian Blonski
The purpose of this study is to question the undifferentiated treatment of individual traders as “dumb noise traders?”. We question this undifferentiated verdict by conducting an…
Abstract
Purpose
The purpose of this study is to question the undifferentiated treatment of individual traders as “dumb noise traders?”. We question this undifferentiated verdict by conducting an analysis of the cognitive competence of individual investors.
Design/methodology/approach
The authors let experts (both experienced researchers as well as practitioners) assess the mathematical and verbal reasoning demands of investment tasks investigated in previous studies.
Findings
Based on this assessment, this paper concludes that individual investors are able to perform a number of complex cognitive actions, especially those demanding higher-order verbal reasoning. However, they seem to reach cognitive limitations with tasks demanding greater mathematical reasoning ability. This is especially unfortunate, as tasks requiring higher mathematical reasoning are considered to be more relevant to performance. These findings have important implications for future regulatory measures.
Research limitations/implications
This study has two non-trivial limitations. First, indirect measurement of mental requirements does not allow authors to make definite statements about the cognitive competence of individual investors. To do so, it would be necessary to conduct laboratory experiments which directly measure performance of investors on different investment and other cognitively demanding tasks. However, such data are not available for retail investors on this market to the best of the authors’s knowledge. We therefore think that our approach is a valuable first step toward understanding investors’ cognitive competence using data that are available at this moment. Second, the number of analyzed (and available) tasks is rather low (n = 10) which limits the power of tests and restricts the authors from using more profound (deductive) statistical analyses.
Practical implications
This paper proposes to illustrate information in key investor documents mostly verbally (e.g. as proposed by Rieger, 2009), compel exchanges and issuers of retail derivatives to create awareness for the results of the reviewed studies and our conclusion and to offer online math trainings especially designed for individual investors to better prepare them for different trading activities, as these have been shown to be as effective as face-to-face trainings (Frederickson et al., 2005; Karr et al., 2003).
Social implications
This study can only be considered as a first step toward understanding the cognitive limitations of individual investors indirectly and could be transferred to other market areas as well.
Originality/value
This study is the first to combine the assessment of outstanding researchers in this field with the results of previous studies. In doing so, this paper provides an overarching framework of interpretation for these studies.