A Behavioral Decision-Making Modeling Approach Towards Hedging Services

Abstract

We propose a model that explains the choice behavior of small and medium sized enterprises (SMEs) with respect to price risk management instruments, one of them being futures contracts. We relate the key components of the model to characteristics of SMEs, in this way explaining differences between the decision units' evaluations of the financial services provided by futures exchanges. The model is tested on data collected from 467 entrepreneurs of small and medium sized enterprises by means of computer-assisted personal interviews. We find that the difference between the futures price and the entrepreneur's reference price, and the components ease of use, performance and entrepreneurship are the key components in the entrepreneur's choice process with respect to financial services. These key components turn out to be related to the SMEs' characteristics innovativeness, market orientation and level of understanding of price risk management instruments. We discuss how these key components can be influenced through the marketing policy of futures exchanges and how our findings can improve the effective design of futures.

Keywords: Choice Process, Cognitive Decision Models, Futures, Multivariate Statistics, Structural Equation Models

JEL Classification: D0, G1, L2, Q0