REP 427 Investing in hybrid securities: Explanations based on behavioural economics
Issued: March 2015
This report was commissioned by ASIC and produced by Queensland Behavioural Economics Group (QuBE). It sets out the results of research into how behavioural biases may influence preferences towards hybrid securities over the less complex financial products of bonds and shares.
This report provides preliminary insight into the behavioural biases and risk attitudes that influence investment in hybrid securities. The findings are based on a pilot study that was commissioned by ASIC due to its concern that some retail investors may struggle to understand the complexity of hybrid securities and the risks they pose.
A key insight from behavioural economic research is that decisions, including investment decisions, are influenced heavily by a range of cognitive biases rather than solely rational consideration of all options. It follows that regulation aiming to improve citizens’ welfare needs to take into account these biases.
The pilot study’s objective was to identify the behavioural biases that impact allocation to hybrid securities within an overall investment portfolio and also assess how the perceived risk of hybrid securities compares with shares and bonds. This can inform conversations with industry, assist in the development of regulatory interventions, and contribute to improvements in ASIC’s programs to advise and educate investors to make more informed decisions (such as via the MoneySmart programs).