Susan Jung Grant and Ying Xie
Executive Summary
Hedging offsets the risk of an existing stake by counterbalancing it with a new stake. For example, hedge fund managers may take an equity position in Airbus to offset Boeing shares already in the portfolio when a government contract is pending, or a gambler at the racetrack may hedge his or her bet on a current favorite by also putting money down on a promising new contender.
What is unclear is how people assess the outcome of a hedging decision. In three experiments, the authors find that rather than assess 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 psychological motivation, known as "self-regulatory goal orientation"—specifically, whether people seek safety and security by minimizing losses, known as a "prevention orientation," or seek 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 by prevention- versus promotion-oriented people; similarly, a choice between options characterized as initiating change elicits greater discrimination among promotion- versus prevention-oriented people (Experiment 3). These effects drive behavioral intentions.
The managerial challenge for practitioners who promote hedging strategies is to encourage investors to view the strategy as a whole rather than to focus on only one of the components, which is the tendency, according to the findings of this study. A proclivity to dwell on only one component of a hedging outcome ex post overshadows the benefit provided by the hedge, which is an ex ante measure to reduce risk.
The question of how a person's motivational orientation affects attention to status quo or change is potentially relevant to various other settings besides hedging. For example, the consumer whose automobile lease is expiring might evaluate the car's residual value differently depending on whether a prevention orientation is dominant (leading to a focus on information related to maintaining the vehicle) or a promotion orientation is dominant (leading to a focus on information related to trading in the vehicle). Although these decisions are substantively equivalent, a consumer's orientation may affect how much weight certain kinds of information have when a decision is ultimately made.
Researchers have only begun to explore the explanatory power of the regulatory goal focus framework in economic contexts. The current research is the first investigation of the role of self-regulatory goal orientation in evaluating economic outcomes in the domain of hedging strategies.
Biography
Susan Jung Grant is Assistant Professor of Marketing in the Leeds School of Business at the University of Colorado, Boulder. She received her PhD in Marketing from the Kellogg School of Management at Northwestern University in 2002. She has published in Journal of Consumer Research and Marketing Letters. Her research interests include financial decision making, information processing, advertising and persuasion, and consumer goals and motivation.
Ying Xie is Assistant Professor of Marketing in Rutgers Business School at Rutgers University. She received her PhD in Marketing from the Kellogg School of Management at Northwestern University in 2004. Her research interests include consumer financial decision making and information processing, promotion response models, advertising, pharmaceutical marketing, sales force management, social contagion, and customer relationship management.
Journal of Marketing Research, Vol. XLIV, No. 3, August 2007
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