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  • Journal of Finance

Can Security Design Foster Household Risk-Taking?

By: Laurent Calvet, Claire Célérier, Paolo Sodini and Boris Vallée
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Abstract

This paper shows that securities with a non-linear payoff design can foster household risk-taking. We demonstrate this effect empirically by exploiting the introduction of capital guarantee products in Sweden from 2002 to 2007. The fast and broad adoption of these products is associated with an increase in expected financial portfolio returns, which is especially strong for households with a low risk appetite ex ante. We explore possible economic explanations by developing a life-cycle model of consumption-portfolio decisions. The capital guarantee substantially increases risk-taking by households with pessimistic beliefs or preferences combining loss aversion and narrow framing. The welfare gains from financial innovation are stronger for households that are less willing to take risk ex ante. Our results illustrate how security design can mitigate behavioral biases and enhance economic well-being.

Keywords

Financial Innovation; Household Finance; Structured Products; Stock Market Participation; Finance; Innovation and Invention; Household; Personal Finance; Risk and Uncertainty; Behavior; Market Participation

Citation

Calvet, Laurent, Claire Célérier, Paolo Sodini, and Boris Vallée. "Can Security Design Foster Household Risk-Taking?" Journal of Finance (forthcoming).
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About The Author

Boris Vallee

Finance
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  • Masdar City: Aiming for Sustainable and Profitable Real Estate By: Boris Vallee and Fares Khrais
  • Can Finance Save the World? Measurement and Effects of Coal Divestment Policies by Banks By: Daniel Green and Boris Vallée
  • A Case in Point: Shared Home Equity By: Daniel Green, Boris Vallee and Sean Bracken
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