Prospect theory and two moment model: the firm under price uncertainty

Udo Broll, Martín Egozcue and Wing-Keung Wong

No 01/09, Dresden Discussion Paper Series in Economics from Technische Universität Dresden, Faculty of Business and Economics, Department of Economics

Abstract: Within the prospect theory the paper examines production and hedging decisions of a competitive firm under price uncertainty. We consider the prospect theory for the firm's utility function in the two moment model known as (mu,sigma)-preference. In contrast to the literature our findings show that the production under uncertainty can be larger than in the certainty case. Furthermore, we demonstrate that although the futures markets are unbiased the firm is overhedging.

Keywords: Prospect theory; mean-variance model; price uncertainty (search for similar items in EconPapers)
JEL-codes: D21 D41 D81 (search for similar items in EconPapers)
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:tuddps:0109

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