Revision requested at the Journal of Business Ethics (a Financial Times 50 journal)
(AUTHORS: A. HOFMANN, N. KLOCKE, M. PELSTER, AND S. WARKULAT)
Financial support by the Frankfurter Institut für Risikomanagement und Regulierung (FIRM) is gratefully acknowledged.
„[...] the most significant risk management failures in recent history have their roots in psychology, and [...] the practice of risk management can be improved by incorporating an explicit psychological dimension.“ (Hersh Shefrin, 2016)
In contrast to theoretical predictions of optimal corporate hedging policies, firms engage in speculative behavior and change the composition of their derivative portfolios on a regular basis. As a direct consequence, hedging ratios show significantly higher volatility than expected, taking into account the relevant fundamentals. The literature refers to the adaption and timing of hedging transactions based on market views as selective hedging. As of today, "the widespread practice of managers speculating by incorporating their market views into firms' hedging programs ("selective hedging") remains a puzzle" (Adam et al., 2017). This project studies how risk managers' personality traits influence their decision-making processes and affect firms' selective hedging behavior.