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

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.