Percieved attractiveness of complex financial products: The role of presentation mode and reference instrument

In many countries, structured (equity-linked) financial products have become an important part of the asset universe available to retail and institutional investors. The global market value of structured products is estimated at USD 2 trillion, one-third of which originates from Europe. The variety of these products has increased strongly since their inception in the early nineties, and some of the most popular products have a complex (non-linear) payoff structure that makes it difficult for investors to correctly assess the risk involved. There is some evidence in the literature that distorted risk perceptions and behavioral biases play an important role in the success of structured products. However, it is not clear how to present complex risk and return profiles to avoid such biases. This question is also important because a new regulation requires the issuing banks to present a product’s risk and return profile in its “Key Information Document” without specifying the presentation mode. In previous work, we have proposed different ways to illustrate risk and return profiles of structured products. The objective of the new study is to find out how the presentation mode affects the perceived attractiveness of the products (between-group experimental design; presentation modes: payoff diagram + description / numerical information / return distribution / dice analogy / fifty ordered returns). Another objective is to examine whether structured products are still perceived as attractive when compared with an appropriate combination of base instruments (riskless asset and market index).