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Multi Cumulative Prospect Theory and the Demand for Cliquet‐Style Guarantees

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  • Jochen Ruß
  • Stefan Schelling

Abstract

Expected Utility Theory (EUT) and Cumulative Prospect Theory (CPT) face problems explaining preferences of long‐term investors. Previous research motivates that the subjective utility of a long‐term investment also depends on interim value changes. Therefore, we propose an approach that we call Multi Cumulative Prospect Theory. It is based on CPT and considers annual changes in the contract values. As a first application, we can show that in contrast to EUT and CPT, this approach is able to explain the demand for guaranteed products with lock‐in features, which in this framework generate a higher subjective utility than products without or with simpler guarantees.

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  • Jochen Ruß & Stefan Schelling, 2018. "Multi Cumulative Prospect Theory and the Demand for Cliquet‐Style Guarantees," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 85(4), pages 1103-1125, December.
    • Handle: RePEc:bla:jrinsu:v:85:y:2018:i:4:p:1103-1125
    DOI: 10.1111/jori.12195
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    Cited by:

    1. Ruß, Jochen & Schelling, Stefan, 2021. "Return smoothing in life insurance from a client perspective," Insurance: Mathematics and Economics, Elsevier, vol. 101(PA), pages 91-106.
    2. Daliana Luca & Hato Schmeiser & Florian Schreiber, 2023. "Investment guarantees in financial products: an analysis of consumer preferences," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 48(4), pages 906-940, October.
    3. Andreas Richter & Jochen Ruß & Stefan Schelling, 2019. "Insurance customer behavior: Lessons from behavioral economics," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 22(2), pages 183-205, July.
    4. Stefan Graf & Jochen Ruß & Stefan Schelling, 2019. "As you like it: Explaining the popularity of life‐cycle funds with multi cumulative prospect theory," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 22(2), pages 221-238, July.
    5. Antje Mahayni & Oliver Lubos & Sascha Offermann, 2021. "Minimum return rate guarantees under default risk: optimal design of quantile guarantees," Review of Managerial Science, Springer, vol. 15(7), pages 1821-1848, October.
    6. Pedro Brandão Graminha & Luís Eduardo Afonso, 2022. "Behavioral Economics and Auto Insurance: The Role of Biases and Heuristics," RAC - Revista de Administração Contemporânea (Journal of Contemporary Administration), ANPAD - Associação Nacional de Pós-Graduação e Pesquisa em Administração, vol. 26(5), pages 200421-2004.
    7. Sweksha Srivastava & Abha Aggarwal & Pooja Bansal, 2024. "Efficiency Evaluation of Assets and Optimal Portfolio Generation by Cross Efficiency and Cumulative Prospect Theory," Computational Economics, Springer;Society for Computational Economics, vol. 63(1), pages 129-158, January.

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