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The Power of Decision Making- Part I

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“Nothing is more difficult, and therefore more precious, than to be able to decide..”
– Napoleon Bonaparte

In a (market/world) of ups and down, changing climate, financial strain, and essentially (taking/making) an educated leap of faith; how do you decide? Have you ever thought of YOUR process of making decisions about risk? More importantly, during times of mental strain or financial pressures, does that affect your decision making? Join me for a series on The Power of Decision Making.

Let’s look at the psychological process of decision making in economic business as well as the psychology of the financial decision making process. I am also interested in your thoughts; answer this, what is your thought process when deciding on buying cattle and how or at what point do you decide these cattle already have too much loss the day you buy them (capacity utilization dilemma) or to pull the trigger to execute a Short Futures Head Position or use an Option?

According to Wikipedia the definition of decision making is this, “Decision making can be regarded as the cognitive process resulting in the selection of a course of action among several alternative scenarios. Every decision making process produces a final choice. The output can be an active or an opinion choice.”

Now answer this question, “Which claims more lives in the United States: lightening or tornadoes?” According to psychologist and author Scott Plous the answer is lightening. If your answer was tornadoes, Plous states that is due to the often public warnings, drills and other kinds of publicity which leads to the misconception that tornadoes are a more frequent cause of death. (The Psychology of Judgment and Decision Making, 1993).  Daniel Kahneman also talks about this in a study that illustrates what he calls the availability heuristic based on the “frequency or probability of an event based on information the mind can imagine or retrieve”.  For example let us assume that this past couple of weeks you have been using Strategy 1 and started scaling up Short Futures Hedges against your Sept-Oct marketings with October Live Cattle Futures and your Nov-Dec marketings against December Live Cattle Futures. Then on Friday afternoon (August 23rd, 2013) the U.S.D.A. reports that cattle placed during July was DOWN 10% (90%) when expectations were for placements to be down only 2% (98%)! Was your initial response that the prior Strategy 1 Short Hedge decisions were wrong and you should liquidate them on Monday morning? At what price does that new information suggest to replace those hedges? 

Mike Elvin, author of Financial Risk Taking: An Introduction to the Psychology of Trading and Behavioral Finance talks about this as well making a trading decision or an everyday judgment based on what first comes to mind, what is also called The Availability Error. (2004, 124). For example, when we decided to buy a new TV we knew exactly what we wanted until we saw our neighbors TV and was so impressed by his description that we went out that night and bought the same TV, only to find out that the picture was not as good. Again, are we making decisions based on what we have been told or see or what is etched somewhere in our mind?

What does psychology say about decision making? Although there are many, two approaches that psychology takes are normative verses descriptive views. A normative approach to making decisions is the thought process that goes into deciding how you ought or should make decisions where a descriptive approach which is how one actually makes a decision. Do you ever make risk decisions based on the information or impression you already have even if you don’t believe it? For example I may decide to order a salad at a restaurant instead of their new bacon BBQ burger because I had heard once from a friend that the hamburger was uncooked and soggy. Even though I really wanted the new bacon BBQ burger not really believing that mine would come that way, I still ordered the salad at the restaurant. In psychology we call this Anchoring Bias. In the market of risk taking and managing risk this may relate to what you may call “Triggers”. Larry Hicks, with Cattleheding.com, outline CattleHedging.com’s 3 Strategies or Triggers as “the automatic or disciplined response without outside influences altering, confusing or changing that decision outlined within a Hedge Policy that has previously defined that response or TRIGGER”! An example of this may be a recent variable that was introduced into your risk management decision making was the withdrawal of Zilmax as a growth additive for cattle feeding. Will this drop carcass weights enough to reduce beef production and result in higher fed cattle prices? Or would TV media of a steer staggering into a slaughter facility detour beef demand, resulting in just the opposite price response?

What does this new information do with your decision making process, or should it? This information initiated a higher Live Cattle Futures response. Some responded with this positive emotion while others used the advance into previous defined TRIGGERS as Selling or HEDGING opportunities, not including the Zilmax news into the decision making process! What was your response?

What about group decisions? Does making a quick risk management decision or “Trigger” (ex. Hedging in a Break-even) get interrupted or swayed by what another feed yard manager is doing or someone within your operation thinks? I would believe that such social pressures do in fact influence our decisions, especially within a financial pressured environment.

Elvin also explains that as traders “we are constantly bombarded with millions of bits of information and we can never be certain that the decisions we make based on the information filtered are correct” (2004, 63). Elvin goes on to describe how the ability to make accurate decisions is the second factor that correlates with successful trading; reiterating the importance of having a Hedge Policy with disciplined Risk Management Strategies, suggested and taught from CattleHedging.com!

We make decisions every day. What should I wear, should I answer this call, do I stop work early to surprise the kids, is this too big of a risk to take? Making decisions are a part of living, working, and really takes a huge part in governing our short term living and future. Taking time to look into your own decision process and thinking about what influences impact your decision making whether it is personal, perceptual, or emotional bias, emotional well-being, life history, rational or irrational belief system, or something else; take a moment and check in with your OWN process and how it may be affecting how you may or may not take risk or manage it.
To be continued….

To learn more about or listen to Judgment and Decision Making from The Discovering Psychology series please visit.

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