Under Expected Utility Theory (EUT) and its behavioural counterpart Cumulative Prospect Theory (CPT), the demand for interest rate guarantees of cliquet style cannot be explained. The reason is that both theories solely focus on the terminal payoff a contract offers and hence completely ignore the stabilizing effect of interest rate guarantees throughout the course of the investment. Recognizing this, recent research has proposed Multi Cumulative Prospect Theory (MCPT) as an approach that extends regular CPT to also include interim value changes of a contract in the policyholder's valuation. We find that under CPT investor preferences, the direct investment yields the highest utility as compared to simple and complex guarantee forms. In contrast to previous findings under MCPT, we show that cliquet style guarantees can only outperform simpler guarantee forms or a direct investment when the investor puts his main emphasis on the subjective utility of the interim changes. As soon as the influence of the terminal value on the subjective utility increases to a certain level, the cliquet style guarantee will be dominated by other products.
