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

Ruß, Jochen; Schelling, Stefan

doi:10.1111/jori.12195

Cited by 34 publications

(24 citation statements)

References 60 publications

(84 reference statements)

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“…So in these examples, not only Expected Utility Theory but also Prospect Theory fails to predict actual human behavior. Ruß and Schelling () claim that people not only regularly assess annual value fluctuations in their evaluations during the term but also include the subjective utility and disutility of potential future annual value fluctuations already in their decision when selecting products. Therefore, based on Prospect Theory and the myopic loss aversion, they have proposed “Multi‐Cumulative Prospect Theory,” a modification of Cumulative Prospect Theory taking into account this effect.…”

Section: Popular Descriptive Models and Corresponding Resultsmentioning

confidence: 99%

“…Since reference points tend to adjust to the current account value, losses from 1 year to the next can have a negative effect on the perception of the product. Consequently, products with annual guarantees excluding losses from 1 year to the next are particularly popular for retirement provision, although these guarantees reduce the upside potential (possibly to a considerable extent particularly in a low interest rate framework), cf., Ruß and Schelling ().…”

Section: Selected Cognitive Distortions and Heuristics And Their Relamentioning

confidence: 99%

“…Now, due to probability distortion, additionally the likelihood of a loss is overestimated. In trying to avoid these losses, many people resort to very high (and therefore very expensive) guarantees, cf., for example, Ruß and Schelling ().…”

Section: Selected Cognitive Distortions and Heuristics And Their Relamentioning

confidence: 99%

See 2 more Smart Citations

Insurance customer behavior: Lessons from behavioral economics

Richter¹,

Ruß²,

Schelling

2019

Risk Manage Insurance Review

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In economics it has traditionally been assumed that people make all their decisions like the so-called homo oeconomicusthat is, maximizing (expected) utility of total wealth.In recent years, economics increasingly recognized that people often exhibit behavioral patterns which are incompatible with the idea of the homo oeconomicus. The field of behavioral economics incorporates insights from the field of psychology to explain discrepancies between predictions of traditional economic theory and actual observed behavior. In this paper, we summarize a selection of well-established behavioral patterns observed in reality and discuss their relevance for the insurance industry when it comes to better understanding and predicting customer behavior. We also explain that people are not always risk-averse and give a brief overview over Prospect Theory (probably the most popular behavioral economics alternative to Expected Utility Theory), its shortcomings for predicting behavior over a long time horizon, and its extensions. In total, we point out that, since dealing with risks and insurance products requires complex decision making processes, a deep understanding of the impacts of behavioral factors is essential to better assess and explain costumer behavior.This article is based on the book "Moderne Verhaltensökonomie in der Versicherungswirtschaft-Denkanstöße für ein besseres Verständnis der Kunden", Springer (2018) by the same authors. The authors gratefully acknowledge the support of Joëlle Näger who translated the first draft.

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Section: Popular Descriptive Models and Corresponding Resultsmentioning

confidence: 99%

Section: Selected Cognitive Distortions and Heuristics And Their Relamentioning

confidence: 99%

See 1 more Smart Citation

Insurance customer behavior: Lessons from behavioral economics

Richter¹,

Ruß²,

Schelling

2019

Risk Manage Insurance Review

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“…Nodes are inevitably affected by this environment and cannot maintain individual rationality, and utility function is bound to be influenced by psychological factors. Because the loss aversion theory has been well applied in the fields of economics [44], game theory [45], biology [46], environmental ecology [47], and so on, it has proved its feasibility. However, according to our study, the loss aversion has not been used in the field of crowdsensing, so we believe that the incentive mechanism of the past crowdsensing system did not make full use of the characteristics of the node and target the incentives.…”

Section: (B)mentioning

confidence: 99%

Analysis of Behavioral Economics in Crowdsensing: A Loss Aversion Cooperation Model

Deng

Qiu

Liu

et al. 2018

Scientific Programming

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The existing incentive mechanisms of crowdsourcing construct the expected utility function based on the assumption of rational people in traditional economics. A large number of studies in behavioral economics have demonstrated the defects of the traditional utility function and introduced a new parameter called loss aversion coefficient to calculate individual utility when it suffers a loss. In this paper, combination of behavioral economics and a payment algorithm based on the loss aversion is proposed. Compared with usual incentive mechanisms, the node utility function is redefined by the loss aversion characteristic of the node. Experimental results show that the proposed algorithm can get a higher rate of cooperation with a lower payment price and has good scalability compared with the traditional incentive mechanism.

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“…Schmidt (2015) shows that using CPT to value insurance demand can yield an optimum of full insurance coverage. To capture the life-cycle dynamics of the repeating payments until death, we use the Multi Cumulative Prospect Theory (MCPT) applied by Ruß and Schelling (2015) where the CPT utility is determined in every period t under consideration of a changing reference point which is represented by the respective liquidity-need D t and finally aggregated with respect to survival prospects. The total utility of person i over his or her stochastic remaining lifespan is the weighted sum of the CPT utilities in each point in time t deflated by a subjective discount factor δ ≤ 1.…”

Section: Multi Cumulative Prospect Theory Valuationmentioning

confidence: 99%

The Modern Tontine: An Innovative Instrument for Longevity Risk Management in an Aging Society

Weinert

Gründl

2017

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractThe changing social, financial and regulatory frameworks, such as an increasingly aging society, the current low interest rate environment, as well as the implementation of Solvency II, lead to the search for new product forms for private pension provision. In order to address the various issues, these product forms should reduce or avoid investment guarantees and risks stemming from longevity, still provide reliable insurance benefits and simultaneously take account of the increasing financial resources required for very high ages. In this context, we examine whether a historical concept of insurance, the tontine, entails enough innovative potential to extend and improve the prevailing privately funded pension solutions in a modern way. The tontine basically generates an age-increasing cash flow, which can help to match the increasing financing needs at old ages. However, the tontine generates volatile cash flows, so that -especially in the context of an aging society -the insurance character of the tontine cannot be guaranteed in every situation. We show that partial tontinization of retirement wealth can serve as a reliable supplement to existing pension products.

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

Cited by 34 publications

References 60 publications

Insurance customer behavior: Lessons from behavioral economics

Insurance customer behavior: Lessons from behavioral economics

Analysis of Behavioral Economics in Crowdsensing: A Loss Aversion Cooperation Model

The Modern Tontine: An Innovative Instrument for Longevity Risk Management in an Aging Society

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