FOR 5392 - TP 8: Designing & Structuring Financial Products to Exploit Retail Investors with Limited Attention

Basic data for this project

Description

Building on experimental as well as observational field data this project seeks to determine the implications of retail investors’ limited attention for investment choices and firms’ design of financial products. In this project we are interested in those salience effects that financial firms can (easily) exploit, namely to effects related to the labelling of financial products, the relative positioning of financial products and the marketed investment strategies for financial products. There is much suggestive evidence that such exploitation is going on. For instance, the number and variety of stock market indices has increased rapidly. For the last five years, there are more investable indices in the US than listed firms, while on average only five funds use a given index and 75 percent of indices are adopted by a single fund. Such niche indices charge higher fees than broadly adopted benchmarks, and just three firms capture 80 percent of the market for benchmark index provision in 2018. While classical economic models have a hard time in explaining these patterns, insights from the literature on limited attention can. Learning about the precise channel that drives such patterns is particularly important to draw suitable policy implications. Precisely, we would like to understand experimentally (1) how benchmarks can be chosen to make products look more favorable and thereby increase firms’ profit margins, and (2) which investment strategies firms can prominently advertise in order to increase investments. By means of experiments and structural models, we want to test whether (3) how attention-grabbing labels can be used to direct demand toward financial products that are dominated in terms of their cost structure. Finally, structural models should provide insides on (4) how policies that restrict the availability of niche benchmarks and extend the consideration set of retail investors affect investor welfare and the profits of index providers and funds.