Persuasion and Persuasibility of Individual Investors by Scenarios

Banks are often accused to bias their information documents in order to exploit less sophisticated investors. This paper analyzes the sales prospectus scenarios created by banks to demonstrate their structured financial products for retail investors. Based on a broad data-set of prospectuses in the US and German markets, we find that, contrary to previous studies of single products, banks do not bias their scenarios to make their products appear better than they are. An experimental study shows that they have little reason to do so since such a bias has no significant impact on potential investors' perception of product return. It does, however, have a small impact on the perception of product risk, as upward-biased returns in scenarios lead to a lower estimation of downside risk. In the light of these results, a stricter regulation of information documents is not necessary