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Multi Cumulative Prospect Theory and the Demand for Cliquet‐Style Guarantees
Author(s) -
Ruß Jochen,
Schelling Stefan
Publication year - 2018
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/jori.12195
Subject(s) - cumulative prospect theory , prospect theory , expected utility hypothesis , interim , economics , loss aversion , investment (military) , microeconomics , contrast (vision) , term (time) , econometrics , mathematical economics , computer science , physics , archaeology , quantum mechanics , politics , political science , law , history , artificial intelligence
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.