The market for structured retail products (SRPs) has grown rapidly in sales volume and complexity in last two decades across the world. Motivated by this phenomenon, this study seeks to understand why unsophisticated retail investors purchase complex financial products and proposes investors' extrapolative expectations as an explanation for the demand for complex financial products using a comprehensive data set on SRPs. I find that products with higher past returns have enjoyed higher sales growth, even though past returns do not predict future performance. Interestingly, this extrapolative effect is stronger for more complex products. Extrapolation, combined with investors' salient thinking (Celerier and Vallee, 2017), leads to the observation of greater popularity of more complex products that happen to deliver better past performance and offer higher headline rates. While there is some evidence of financial intermediaries exploiting investors in early part of the sample, my results further suggest that the rapid market growth has led to more competition among intermediaries, which in turn disciplines exploitation.​

Keywords: Extrapolative Expectation, Exotic Options, Financial Derivatives, Financial Engineering, Salient Thinking, Structured Retail Products