The appeal of registered index-linked annuities for myopic prospect theory investors

Investors with preferences based on prospect theory may choose different investment strategies due to their perception of rare market events. We revisit research on preferences for financial guarantees offered by US life insurers to show how the appeal of registered index-linked annuities (RILAs) to such investors depends on their subjective evaluation of rare but extreme events. We further show that our model offers an explanation for the growing popularity of this new guarantee, but also accurately captures sales patterns across different types of RILAs. Our results suggest that life insurers create value for retail investors by tailoring financial guarantees to their behavioral preferences.