In our last commentary, we talked about identifying reasonable outcomes to your risk management plans, but your personality, beliefs and behaviors have a significant impact on how you reach decisions.
Beliefs and behaviors most commonly function on autopilot unless we direct their course, and this is especially true when it comes to risk.
Some of these autopilot behaviors fall into very predictable profiles. When unchallenged, assuming these profiles can significantly compromise decision-making capacity and thus handicaps advisory teams.
Do you occasionally fall into any of these three habits?
#1: The Producer Fortuneteller: Producer “x”, his or her bank advisors and the risk management team objectively assess risk tolerances. The team establishes an ambitious risk management goal for the year that would not only secure the operation but also provide some margin on top. When advisors attempt to roll out execution, producer “x” resists taking positions that would align with his goals because he fears or hopes or has a gut feeling that the markets will reveal some opportunity he can’t miss. Execution then becomes point-to-point so, instead of success being measured against the original goal, success becomes a matter of how well we scramble . . . or gamble.
#2: The “Plant the Flag” Producer: This scenario is not unexpected given the way our brains struggle with change. In the first quarter, Producer “x” plants himself in a position based on fairly solid logic—historical data, import activity, corn prices, USDA reports, etc. Then something happens—a major disease challenge, China refuses product, drought, packer musical chairs. Producer x has already invested considerable time and emotion in making the first decision and is reluctant and often resistant to investing more effort or changing when the markets are unpredictable anyway. It was a good idea in January and producer x believes things will even out . . . until his position completely falls apart.
#3: The Buyer’s Remorse Producer: Fear, shame, perfectionism, and anxiety paralyze decision-makers. This is particularly true for those with personal histories of being criticized, experiencing failure (think 1998) or attempting to navigate work environments characterized by micromanagement, excessive scrutiny, second guessing, and unclear or shifting expectations. Advisory teams or stakeholders with this type of mindset tend to ruminate on what they missed by not taking a position, or what they lost because they did. If you believe you are going to get burned, it’s natural to pull back from the stove. If you want to manage risk, you have to question beliefs and assumptions about being burned. Buying insurance is different than losing money. If you are going to avoid fear- and anxiety-based decision-making, you want to adopt perspective that contextualizes hedging as “protection” — an overlay of the trade against the premium price negotiated for corn or pigs.
Remember, producers who consistently reject advice, or those who require considerable reassurance and postmortem evaluations, may eliminate themselves from being the first candidates for consideration when the market offers short-turnaround opportunities. Thoroughly discussed strategic plans are great for methodical growth and this suits many producers. But, when markets surface short term windows of opportunity, advisors tend to focus on those clients with whom they’ve built trust, and on those clients who can have operational and personal flexibility to respond to advice.
Editor’s Note: Karen Kerns is CEO of Kerns & Associates, a risk management firm serving agriculture in Ames, Iowa. The company employs a holistic approach to agricultural risk management, operating as an extension of clients' operations to ultimately enhance their customers’ profitability. For more information, call 515.268.8888, or go to http://www.kerns-associates.com/