Hedging Your Bets and Assessing the Outcome

Susan Jung Grant · Ying Xie

12 citations0/0 files storedJournal of Marketing Research

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Decision-Making and Behavioral Economics Experimental Behavioral Economics Studies Behavioral Health and Interventions

Abstract

Hedging offsets the risk of an existing stake by counterbalancing it with a new stake—for example, complementing a bet on the race favorite with another bet on a promising upstart. In three experiments, the authors find that rather than assessing the hedge as a whole, people tend to react to the hedging outcome by focusing on either the original stake or the new one. The authors show that the hedger's focus is linked to a psychological motivation of whether to pursue safety and security by minimizing losses, known as a “prevention orientation,” or to pursue growth and advancement by maximizing gains, known as a “promotion orientation.” When the context is gambling, prevention-oriented people fixate on what happens to the status quo stake, whereas promotion-oriented people attend to the new stake (Experiment 1). The same conclusion emerges from a stock-investing context (Experiments 2a and 2b). Moreover, because selective attention to status quo and change is the mechanism at work, the authors find that a choice between options characterized as maintaining the status quo elicits greater discrimination among prevention-oriented than promotion-oriented people; similarly, a choice between options characterized as initiating change elicits greater discrimination among promotion-oriented than prevention-oriented people (Experiment 3). These effects drive behavioral intentions.

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References

1997Beyond pleasure and pain.1998Promotion and Prevention: Regulatory Focus as A Motivational Principle 1985The Determinants of Firms' Hedging Policies 1993Risk Management: Coordinating Corporate Investment and Financing Policies 1997Regulatory Focus and Strategic Inclinations: Promotion and Prevention in Decision-Making 1997Why Firms Use Currency Derivatives 2000The pleasures and pains of distinct self-construals: The role of interdependence in regulatory focus.1994Ideal versus ought predilections for approach and avoidance distinct self-regulatory systems.

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