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A Behavioral Approach towards Futures Contract Usage

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Title: A Behavioral Approach towards Futures Contract Usage
Author(s): Pennings, Joost M.E.; Leuthold, Raymond M.
Subject(s): behavioral decision-making model
Abstract: We propose a behavioral decision-making model to investigate what factors, observable as well as unobservable, owner-managers consider regarding futures contract usage. The conceptual model consists of two phases, reflecting the two-stage decision structure of manager's use of futures. In the first phase owner-managers consider whether futures are within the market choice set for the enterprise. In the second phase the owner-manager decides whether or not to initiate a futures position when confronted with a concrete choice situation. In both phases owner-manager's beliefs and perceptions play an important role. The proposed model is tested on a data set of Dutch farmers, based on computer-assisted personal interviews. Because we incorporate latent variables (e.g., perceptions and beliefs) in both phases, we propose an estimation procedure that takes the measurement error of these latent variables explicitly into account. The implications of the behavioral decision-making model for futures contract design are derived.
Issue Date: 2000-10
Publisher: Office for Futures and Options Research, Department of Agricultural Economics, College of Agricultural, Consumer, and Environmental Sciences at the University of Illinois at Urbana-Champaign
Series/Report: OFOR Working Paper Series, no. 00-08
Genre: Working / Discussion Paper
Type: Text
Language: English
Publication Status: published or submitted for publication
Peer Reviewed: not peer reviewed
Date Available in IDEALS: 2008-03-17

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