Managerial Risk Attitudes and Biases, and Hedging Behaviors in the Financial Markets
9 Pages Posted: 20 Nov 2012
Date Written: December 1, 2011
Corporate finance research often assumes that investors and managers in financial markets behave in a rational manner out of fully rational sets of beliefs, attitudes, and preferences. Financial risk management theory and textbook hedging which are based on the rational manager assumptions suggest that in seeking to manage financial risks, managers would do so by strategically investing in financial instruments that are negatively correlated with their primary investments in order to neutralize the risk of adverse movements in the value of their investments as far as possible. The evidence however, contradicts this expectation. Behavioral theory and research has shown that attitudes and decision-making biases affect behaviors and outcomes of decision-making processes. This paper discusses the case that the bounded rationality of managers, decision-making biases, and managerial attitudes towards risk and uncertainty are critical components to corporate hedging decision-making and practice that could explain the deviations of actual corporate hedging policies and practices from those predicted by theory.
Keywords: Behavioral finance, Bounded rationality, Decision-making biases, Risk attitudes, Managerial hedging behaviors
JEL Classification: D81, G14
Suggested Citation: Suggested Citation