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Exploited by complexity

Author

Listed:
  • Gao, Pengjie
  • Hu, Allen
  • Kelly, Peter
  • Peng, Cameron
  • Zhu, Ning

Abstract

Due to their complex features, structured financial products can hurt the average investor. Are certain investors particularly vulnerable? Using account-level transaction data of retail structured funds, we show that the rich (sophisticated) benefit from complexity at the expense of the poor (naive). The poor-to-rich wealth transfer that results from trading structured funds is substantially greater than from trading simple, nonstructured funds. In an event study, we further confirm that part of this wealth transfer can be directly attributed to investors' differing responses to complexity. In particular, when a market crash triggers funds into a restructuring process and their prices are expected to shrink by half on a given day, the poor and naive subset of investors fails to respond effectively.

Suggested Citation

  • Gao, Pengjie & Hu, Allen & Kelly, Peter & Peng, Cameron & Zhu, Ning, 2020. "Exploited by complexity," LSE Research Online Documents on Economics 118867, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:118867
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    File URL: http://eprints.lse.ac.uk/118867/
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    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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