Staff Publications

Staff Publications

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    'Staff publications' is the digital repository of Wageningen University & Research

    'Staff publications' contains references to publications authored by Wageningen University staff from 1976 onward.

    Publications authored by the staff of the Research Institutes are available from 1995 onwards.

    Full text documents are added when available. The database is updated daily and currently holds about 240,000 items, of which 72,000 in open access.

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Record number 371032
Title Probability Weighting and Loss Aversion in Futures Hedging
Author(s) Mattos, F.; Garcia, P.; Pennings, J.M.E.
Source Journal of Financial Markets 11 (2008)4. - ISSN 1386-4181 - p. 433 - 452.
Department(s) Marketing and Consumer Behaviour
Publication type Refereed Article in a scientific journal
Publication year 2008
Keyword(s) cumulative prospect-theory - myopic loss aversion - portfolio choice - decision weights - risk-aversion - house money - utility - uncertainty - elicitation - investors
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.
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