A Behavioral Decision-Making Modeling Approach Toward Hedging Services

Abstract

This paper takes a behavioral approach toward the market for hedging services. A behavioral decision-making model is developed that provides insight into how and why owner-managers decide the way they do regarding hedging services. Insight into those choice processes reveals information needed by financial institutions to improve the design of their financial products. The key elements of the model are related to the characteristics of the owner-managers, thereby exploring the decision units' evaluations of the hedging services provided by futures exchanges. Using structural equation models and data from 467 owner-managers, obtained by means of computer- assisted personal interviews, we find that the elements "exercising entrepreneurial freedom," "perceived performance," and the "owner-manager's reference price" determine their attitude toward using futures. These elements are related to innovativeness, risk attitude, and level of understanding of futures markets.