Applications of Production Decision Models under Risk A Decision Analysis Approach with Incorporation of Behavioral Utilities

A conceptual model examines the competitive firm’s optimal input and hedging decisions under price and output uncertainty. Behavioral utility functions are incorporated to represent the firm’s irrational organizational behaviors. The model is then solved in a numerical example using decision analysis methods. It is shown to be capable to solve for the optimal decisions under different market conditions and characteristics of the firm. Subsequent sensitivity analyses suggest that optimal level of hedging is heavily influenced by the futures price and the firm’s risk preferences.