Options and structured products in behavioral portfolios

Options and structured products have no roles in mean–variance portfolios, but they have roles in behavioral portfolios. Behavioral portfolios are composed of mental account sub-portfolios, each associated with a goal, such as retirement income or bequest. Investors optimize each mental account by f...

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Published inJournal of economic dynamics & control Vol. 37; no. 1; pp. 137 - 153
Main Authors Das, Sanjiv R., Statman, Meir
Format Journal Article
LanguageEnglish
Published Amsterdam Elsevier B.V 01.01.2013
Elsevier Sequoia S.A
Subjects
Asset allocation
Behavioral portfolios
Behavioural economics
Economic control
Economic dynamics
Expected returns
Options
Options on stocks
Portfolio analysis
Portfolio investments
Probability
Put & call options
Structured products
Studies
Behavioral portfolios
Options
Structured products
G2
G11
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Summary:Options and structured products have no roles in mean–variance portfolios, but they have roles in behavioral portfolios. Behavioral portfolios are composed of mental account sub-portfolios, each associated with a goal, such as retirement income or bequest. Investors optimize each mental account by finding the assets and asset allocation that maximizes the expected return of each mental account sub-portfolio subject to the condition that the probability of failing to reach a preset threshold aspiration level not exceed a preset probability. Put options are useful in ‘downside protection’ mental accounts whose goal is avoiding poverty, whereas call options are useful in ‘upside potential’ mental accounts whose goal is a shot at riches. We also explore the roles in behavioral portfolios of option collars, capital guaranteed notes, and barrier range notes.
Bibliography:ObjectType-Article-2
SourceType-Scholarly Journals-1
ObjectType-Feature-1
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ISSN:0165-1889
1879-1743
DOI:10.1016/j.jedc.2012.07.004