For Those Who Want It All... Salience and Behavioral Financial Engineering in the French Financial Retail Market of the Early 2000s

Authors

  • Rodrigue Mendez Université du Littoral LEM-CNRS

DOI:

https://doi.org/10.33423/jaf.v19i1.1031

Keywords:

Accounting, Finance, Business, Economic, Market

Abstract

This paper presents an in-depth analysis of the BNP Garantie JET 3, a complex retail structured product that was marketed in France in the early 2000s. To understand the risk-return profile of the JET 3 contract, we simulate the distribution of its payoffs. Then we show that the demand for the JET 3 is hard to explain with standard risk-return preferences, since the product is usually dominated by others simpler portfolios. This is no longer the case if we assume that the investor has a "salience bias (Bordalo et al., 2012), i.e. a tendency to overweight salient payoffs. This is due to the fact that the JET 3 has two built-in features that are very attractive for a salient-biased investor: full insurance and very high payoffs in the good states. We show that the JET 3 dominates the relevant alternatives if the salience bias is big enough. We conclude that the JET 3 might be a good instance of behavioral financial engineering, i.e. the design of complex financial products that take advantage of the investors’ behavioral biases to shroud risk and high fees.

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Published

2019-03-26

How to Cite

Mendez, R. (2019). For Those Who Want It All. Salience and Behavioral Financial Engineering in the French Financial Retail Market of the Early 2000s. Journal of Accounting and Finance, 19(1). https://doi.org/10.33423/jaf.v19i1.1031

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Section

Articles