Production and Hedging Decisions under Regret Aversion

In this paper, we investigate the production and hedging decisions when the competitive firm is not only risk averse but also regret averse. Regret aversion is characterized by a utility function that includes dis-utility from having chosen ex-post suboptimal alternatives. We first show that regret aversion has no effect on the optimal production level. While the presence of regret aversion will always reduce the optimal hedging position. Besides, with more regret aversion, the optimal hedging position will become smaller