Pssst … have you heard about this great new investment product called hybrid securities? They’re terrific. Rather than having to choose between high-reward, high-risk shares and low-risk, low-reward bonds and other debt securities, hybrids give you the best of both worlds: high reward, low risk.
At least, that’s what I think. And it’s probably what the outfit that sold me the hybrids wanted me to think. But it’s certainly not what the Australian Securities and Investments Commission wants people to think.
It regards hybrid securities as highly complex, tricky investments. They often promise high yields and are issued by well-known companies with trusted brands, but “investors need to very carefully consider the features and risks before investing”.
So keen is the commission to make sure it’s getting the message through to potential investors that it did something unusual: it resorted to the behavioural economists – those who, rather than assuming everyone always acts rationally, use psychology to discover how real people make decisions – to help it understand what it is that attracts people to hybrids.
It commissioned the Queensland behavioural economics group at the Queensland University of Technology Business School to conduct some experiments. The group assembled a lot of business-school uni students and gave each of them 100 units to be notional invested in a portfolio of bonds, hybrids and shares, getting them to take it seriously by promising to let them keep any profit they made.
First, however, it asked each student a bunch of questions designed to establish whether their decision-making was influenced any of a range of “cognitive biases” rather than solely rational consideration of the options.
Investors are known to be commonly affected by such “heuristics” (mental shortcuts) as the availability bias, representativeness bias, framing bias, recency bias, overconfidence, illusion of control, competence bias, ambiguity aversion and mental accounting. Read more
Source: The Age
