A New Way of Thinking: Defined Outcome Investing as a Means to Mitigate Aversions

By Joseph Halpern and Lawrence Solomon

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Defined Outcome Investing

The average investor defines and mitigates risk in ways that do not align neatly with classical financial theory. Deeply ingrained aversions to loss, risk and ambiguity often lead to investment decisions that clash with the imperative of maximizing risk-adjusted returns. Indeed, a growing body of research in behavioral finance confirms that cognitive biases can materially and adversely affect portfolio performance.

But no amount of research will transform how and why human investors make decisions. Ultimately, the typical investor wants more security, predictability and transparency than has traditionally been available in the marketplace. That unmet need results in a disconnect between portfolio performance optimization and investor behavior.

A solution can be found in defined outcome investing strategies. Defined outcome investing refers to an investment method which shapes the potential outcomes of an existing index or security (e.g., the S&P 500) to fit pre-set protection and return levels, allowing for a more controlled investment experience. As such, they are uniquely able to deliver market exposure while satisfying the psychological needs of investors.

Despite their benefits, the structure and performance characteristics of most existing defined-outcome investment products make them unsuitable or inaccessible for all but the most affluent investors. Exceed’s fund and index products deliver defined outcome characteristics with significantly improved liquidity, lower fees, mitigated credit risk, and other benefits relative to existing solutions.

The full white paper discusses current thinking of leading behavioral finance experts on several investment related topics, including:

  • Drivers of Investor Behavior from both a Utility and Psychological perspective
  • Understanding Loss, Risk and Ambiguity Aversions
  • The Effect of Aversions on Portfolio Allocation
  • Mitigating Aversions with Defined Outcome Strategies