Managerial Risk Attitudes and Biases, and Hedging Behaviors in the Financial Markets

9 Pages Posted: 20 Nov 2012

Date Written: December 1, 2011

Abstract

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

Adams, Francis K., Managerial Risk Attitudes and Biases, and Hedging Behaviors in the Financial Markets (December 1, 2011). Available at SSRN: https://ssrn.com/abstract=2178125 or http://dx.doi.org/10.2139/ssrn.2178125

Francis K. Adams (Contact Author)

Pennsylvania State University ( email )

School of Graduate Professional Studies
Great Valley
Malvern, PA 19355
United States

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