 Probability weighting and loss aversion in futures hedgingFabio Mattos, Philip Garcia and Joost Pennings () Journal of Financial Markets, 2008, vol. 11, issue 4, 433-452 Abstract: We analyze how the introduction of probability weighting and loss aversion in a futures hedging model affects decision making. Analytical findings indicate that probability weighting alone always affects optimal hedge ratios, while loss and risk aversion only have an impact when probability weighting exists. In the presence of probability weighting, simulation results for a relevant range of parameter values suggest that probability weighting is dominant; changes in probability weighting affect hedge ratios relatively more than changes in loss and risk aversion. When decisions are made independently, loss aversion has a relatively small impact on hedge ratios for all parameter values, and risk aversion becomes important for only a narrow range of risk coefficients which produce implausible speculative behavior. When prior losses and gains affect behavior, hedging is influenced most by prior outcomes that influence risk attitudes, but this effect is still somewhat less than the consequences of changes in probability weighting. Keywords: Probability; weighting; Loss; aversion; Futures; markets; Hedging (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:11:y:2008:i:4:p:433-452 Access Statistics for this article Journal of Financial Markets is currently edited by B. Lehmann, D. Seppi and A. Subrahmanyam More articles in Journal of Financial Markets from Elsevier |
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