The analysis of decision-making under risky conditions and uncertainty has traditionally been explained using expected utility theory. According to this theory, humans make the best choice considering expectations, asset integration, and risk aversion in the face of uncertainty, because people are rational (Von Neumann and Morgenstern, 1947). Friedman and Savage (1948) assert that humans endeavor to maximize utility and profit even when there is risk involved. However, decisions made by humans under uncertain conditions have not been adequately explained by traditional theories. Hence, Kahneman and Tversky (1979) introduced prospect theory, a behavioral theory of decision-making under conditions of uncertainty. They claimed that people tend to avoid risk when there are gains and take risks when faced with losses.

Kahneman and Tversky (1979) experimentally analyzed people’s risk preferences. In Experiment 1 of their study, 82% of people chose to get Israeli shekel (“ILS”) 2400 with 100% probability, and only 18% of participants selected the chance to get more than ILS 2400 with 99% probability. In the third experiment, 80% of the participants chose to obtain an ILS 3000 at 100% probability, and only 20% chose to obtain an ILS 4000 at 80% probability. In Experiment five, 78% of the participants chose to travel to the UK for a week with a 100% probability, and 22% chose to travel to Europe for three weeks with a 50% probability. The authors argued that people are more focused on certainty than on high probability. This phenomenon is known as the certainty effect.

They also claimed that humans tend to avoid risks. Shiller (1998) stated that people are willing to purchase insurance because they prefer to avoid risk. These results are inconsistent with the maximum expected value found in expected utility theory. However, they are consistent with the risk-aversion assumption of the theory. Through experiments, Kahneman and Tversky (1979) demonstrated that expected utility theory does not adequately explain human decision-making under conditions of uncertainty. In Experiment 3.2, 92% of the participants chose to lose ILS 4000 with an 80% probability, and only 8% chose a sure loss of ILS 3000. In Experiment 7.2, 92% of the participants chose a risk of 45% to lose ILS 6000, and only 8% chose to lose ILS 3000 with a 90% probability. In Experiment 8, 73% of the participants chose the chance of acquiring ILS 6000 at a probability of 0.1%, whereas 27% chose the chance of acquiring ILS 3000 at a probability of 0.2%. However, in Experiment 8.2, 70% of the participants chose to lose ILS 3000 at a 0.2% probability, and 30% chose to lose ILS 6000 at a 0.1% probability. These experimental results cannot be explained using expected utility theory. The authors asserted that losses and gains are the reference points associated with human decision-making under conditions of uncertainty and risk; humans respond more sensitively to losses than to gains.

Tversky and Kahneman also demonstrated human loss-aversion tendencies in an article published in 1981. In Experiment 3.1, 84% of the participants opted for a sure gain of $240, and only 16% chose to receive $1000 with a 25% chance. However, in Experiment 3.2, only 13% of the participants opted for a sure loss of $750, whereas 87% of the participants chose to lose $1000 with a 75% probability. In Experiment 4, 100% of the participants selected a 25% chance of receiving $250 or a 75% chance of losing $750 over a 25% chance of getting $240 or 75% chance of losing $760, respectively. In Experiment 5, 78% of the participants opted for a definitive $30 acquisition, while 22% chose to earn $45 at an 80% probability. In Experiment 6, 74% of the participants selected a definite $30 acquisition, whereas 26% chose an 80% chance of receiving a $45. Most of the choices resulting from these decision-making processes are driven by loss aversion and certainty.

Kahneman and Tversky (1984) argued that most people prefer gain and loss aversion over gains or losses related to gambling, even though the latter mathematically had higher expectations. Undoubtedly, decision makers prefer to adopt loss-avoidance strategies (Tversky and Kahneman, 1979, 1984, 1981, 1986).

Tversky and Kahneman (1991) stated that the reason for choosing loss aversion in decision-making processes can be found in the imbalance between happiness and pain. Decision-makers place more emphasis on the negative than the positive when experiencing the results of the experiments, because pain is fatal and more serious to people than pleasure. They also asserted that experience creates reference points for decision-making and directly impacts it.

Dimmock and Kouwenberg (2010) claim that several households do not like to invest in stock markets despite the high return on investment. In particular, households with higher loss aversion do not prefer to invest in stocks; instead, they gravitate toward mutual funds.

According to Baghestani (2016), when gasoline prices dropped in the U.S., consumers saw the economic outlook as positive. Nonetheless, there was no change in consumer expenditure during that time. By contrast, when gasoline prices rose, consumers saw the economic outlook as negative, and, as a result, consumer spending decreased. The authors state that people tend to focus more on negative phenomena.

Xie et al. (2018) analyzed the relationship between GDP per capita and loss aversion. They claimed that loss aversion increases in richer countries with more mature financial markets.

Meng and Weng (2018) contend that loss aversion directly affects disposition effect. If investors’ assets reach their expected values, they tend to dispose them off because of their loss aversion tendencies.

Baghestani (2019) argues that if the current economic situation is evaluated as bad, consumers’ proclivity to purchase a car deteriorates. However, when it improves, consumers’ attitudes towards purchasing a car remain unchanged. He believes that people are more concerned about negative situations.

It is estimated that loss aversion has a direct impact on shipping and ship finance-related decisions. During the boom period of shipping, some shipowners were able to generate more profits through spot business or short-term charter contracts, but there were frequent cases where charter rates were fixed through long-term charter contracts due to concerns about falling freight rates. In this study, we analyzed how loss aversion affects ship finance decision-making.

Humans are more likely to use similar examples to make decisions and weigh recent information based on all related information in the decision-making processes. This phenomenon is known as availability heuristic. The availability heuristic directly affects the decision-making process (Tversky and Kahneman, 1973). Further, Tversky and Kahneman (1974) contended that people’s decision-making under conditions of uncertainty is affected by cognitive biases and heuristics learned from experience.

Detmer et al. (1978) insisted that estimates of mortality rates differ significantly between surgeons who work in fields with high and low mortality. This was because the estimates were based on surgeon experience.

Doctors are more likely to judge a patient’s condition as more serious or judge the symptoms as less serious because of their treatment experience. Suppose a physician has experience in treating a similar patient, the physician could improperly use antibiotics based on experience (Poses and Anthony, 1991).

When past events reoccur, humans are more likely to rely on past features and experiences when forecasting future conditions because of their dependence on given information (Agans and Shaffer, 1994).

Stapel et al. (1995) contended that people use past examples that are readily available for decision-making. However, if these past examples are irrelevant, people may use other information to select more appropriate strategies.

Buckingham and Adams (2000) asserted that the availability heuristic strongly influences nurses’ clinical decisions concerning patients.

Hertwig et al. (2004) asserted that humans rely heavily on experience when making risky choices. In particular, people tend to make risky choices based on the experiences gained from recent events.

Owing to constraints such as limited time, information, and cognitive capacity, it is not easy to evaluate and find the optimal solution for all issues in the real world. Thus, humans make decisions based on their learning and experience. Players must make quick decisions in the sports domain because speed is vital and limited information is available during the game. Thus, players must make instantaneous decisions based on their experience and judgment (Bennis and Pachur, 2006).

Sunstein (2006) insists that countries that have experienced climate change are more concerned about it than countries that have not experienced it severely. Under conditions of uncertainty in financial markets, availability heuristics directly impact investor behavior in stock markets (Kliger and Kudryavtsev 2010).

Sjoberg and Engelberg (2010) contended that availability heuristics tend to easily recall memory. For example, they claimed that people who watch disaster movies can easily recall nuclear power and fire dangers.

Haden et al. (2012) claimed that farmers are concerned about the serious events that they have experienced in relation to climate change and tend to take personal measures. They also assert that, as they have learned from experience, California farmers have been seriously concerned about water scarcity and have tried the hardest to address the water shortage. Mase et al. (2015) insisted that availability heuristics have a direct effect on agricultural advisors recognizing the risks of climate change.

Chen et al. (2017) assert that the Taiwanese stock market displays a “January effect” because of the availability heuristic. Taiwanese companies pay bonuses before the Chinese New Year and workers are more likely to purchase shares to increase their wealth. Thus, Taiwan’s stock market tended to increase in January. In the case of insufficient information, availability heuristics can strongly impact the prices of the shares of low-capitalization companies and increase stock price volatility after a given event (Kudryavtsev, 2018).

It is inferred that the availability heuristic has had a significant impact on decision-making related to shipping and ship finance. From 2004 to the first half of 2008, freight rates and ship prices of bulk carriers continued to rise. As a result, it is estimated that some domestic shipping companies purchased multiple secondhand ships at high prices and chartered several ships at high charter rates because they judged that high freight rates and ship prices would be maintained. It is also expected that the availability heuristic may influence decision making. In this study, we analyzed how the availability heuristic affects ship finance decision-making.

In the case of A Shipping Company, two respondents provided narrative responses. The participants in charge of shipping finance negotiations with the KPSF were the directors and managers of the shipping company. The questions were as follows:

The contents of the above [Table 1] are actual questionnaire questions and multiple-choice answers of the survey conducted for this study. The questionnaire questions and multiple-choice answers were prepared based on previous studies. These questions and answers were modified from questionnaires and statements used by behavioral finance scholars, and converted into questionnaires and multiple-choice answers applicable to analyzing ship finance decisions. Questions and answers were also prepared based on negotiations of ship finance projects executed by the KPSF for shipping companies in the past.

The survey was conducted over the course of three weeks in February 2020. After completing the questionnaire on Google Forms, a text message was sent to the ship finance and shipping industry workers to ask them to participate in the survey. A total of 56 people participated in the survey. Most of the survey participants were industry practitioners and experts who had directly or indirectly experienced and performed ship finance-related work over a long period as employees in the shipping and ship finance industry. The details of the survey participants are shown in the above [Table 2].

Since the collapse of Lehman Brothers in 2008, most new shipping financing supported by financial institutions has halted, and A Shipping Company has not been an exception. It experienced tremendous hardships due to the shipping market’s decline and the liquidity crisis. Therefore, the company participated in the KPSF ship-financing program with 17 debt-free vessels in their possession to secure liquidity (Maritime Press, 2009). During this process, the company accepted a five-year maturity USD fund with an interest rate of 8.5%. Since the interest rate for issuing a five-year USD bond for POSCO, which has one of the highest credit ratings in Korea, was 8.95% (Kim, 2009), an interest rate of 8.5% was acceptable for A Shipping Company in 2009 (Kim, 2009; Bu, 2009).

However, the interest rate of A Shipping Company’s financing was below the level of L+100bps before the Lehman Brothers crisis (Infomax 2020; Marinemoney 2020). Therefore, the 8.5% interest rate was still very high compared to previous interest rates. Executive managers and the board of directors expected the financial turmoil to be temporary. They also expected that the interest rate in shipping finance would decrease back to the previous rates. Despite this, during the negotiation process, the shipping company requested a five-year maturity financing agreement instead of short-term financing of two or three years, because they were not certain of the possibility of re-financing with a lower interest rate in two to three years.

According to the narrative responses, respondents A1 and A2 stated that the company experienced several difficulties in securing ship financing during the Lehman Brothers crisis. Therefore, during the decision-making process in arranging shipping finance with the KPSF, the company adopted a five-year term loan instead of a short-term loan because it prioritized stability. Such decision-making demonstrates humans’ availability heuristics, certainty effects, and loss-averse tendencies, as asserted by Tversky and Kahneman (1973, 1979). Hertwig et al. (2004) claimed that people tend to make choices based on the experiences gained from recent events. Kliger and Kudryavtsev (2010) insist that people use past experiences in their decision-making processes. Baghestani (2019) argues that people are more concerned about negative situations. Meong and Weng (2018) contend that loss aversion directly impacts decision-making. Dimmock and Kouwenberg (2010) claim that decision makers prefer to adopt loss-avoidance strategies. It can be concluded that the decision-making process in this case corresponds exactly to behavioral finance theory. However, A Shipping’s decision to prioritize certainty and avoid losses did not lead to the best business and financial management outcomes. Several cases of financial decisions based on certainty and loss aversion have been evaluated as mistakes.

According to information provided by Yonhap Infomax and Financial News, Samsung Electronics secured USD 460 million through the Yankee bond in 1997, with an interest rate of 7.7%. The bond was issued under the condition of 30-year maturity, and the coupon is still paid off at a high interest rate because it is not possible to receive an early redemption (Choi, 2016). This was an excellent investment choice for creditors, as it secured high profitability and stability. However, Samsung Electronics is desperate for early redemption, because it has abundant liquidity and the highest credit rating worldwide. Samsung Electronics’ decision to secure certainty in an unstable financial market was irrational.

Based on the information provided by the Infomax database, the coupon rate on the 5-year public corporate bonds rapidly soared to the high 6% level after the Lehman crisis, and then gradually declined to less than 3% in 2012.

Using data collected from the Infomax database, the below [Fig. 1] shows the interest rates for non-guaranteed 5-Year corporate bonds with a BBB rating, which is the credit rating of A Shipping Company in 2009. The bond market showed full recovery from Lehman Brothers’ after effects by the second half of 2012.

Shipping finance has characteristics similar to those of mortgage finance, with vessels as mortgages. It is similar to corporate finance because it is supported by the creditability of a company (Harwood, 1995). Hence, it is inappropriate to compare the interest rates of ship finance to non-guaranteed bonds issued solely based on a company’s credit rating. The data provided above are meant only to analyze interest rate trends.

The above [Table 3] shows the dollar interest rates provided to Korean shipping companies by the KPSF. As shown in the table, interest rates started to drop in 2009. The KRW and USD funding rates for the KPSF have decreased rapidly since 2010.

According to data provided by the Infomax and Marinemoney databases, the interest rate for shipping finance of A Shipping Company was below L+100bps before the Lehman Brothers crisis. After the collapse, it became extremely difficult for the company to procure shipping finances with high interest rates of approximately L+700bps.

When examining the interest rate trends for domestic and overseas shipping provided by financial institutions working with the KPSF shipping fund, it was nearly impossible to secure ship financing after the collapse of the Lehman Brothers in 2009. In 2010, maximum support was still inactive, but from 2011 onward, active support for ship finance emerged (Kwak, 2011).

The DVB and Nord LB banks in Germany and other global ship financing banks in Europe and Singapore expressed their intention to participate in the shipping finance support program of the KPSF fund, and they were able to provide interest rates of up to L+250-300bps in 2011 (Kwak, 2011; 2012). In 2012, participation potential and interest rates were maintained at levels similar to those in 2011. Later in 2013, interest rates increased slightly and were maintained at a normal rate up to the present day.

A Shipping Company has been requesting early repayments on their loans to the KPSF since the second half of 2012 (Kim, 2014; Kwak, 2014; Seong, 2016; Shipping Daily, 2014) because they could have used these vessels in the market to procure more funds at a lower interest rate. However, considering the swap-breaking cost, an early redemption would result in more losses than profits for the company. The fund created in 2009 used the cross-currency interest rate swap (“CCIRS”) and the issuance of a KRW bond, because the KPSF fund was a dollar support program with a fixed five-year principal and interest. This is because it uses the CCIRS guaranteed by the KPSF to ameliorate the financial situation of the shipping company.

When looking at the below [table 4] about results of analyzing the narrative responses, the company’s decision to procure five-year maturity ship finance, as explained by behavioral finance, to prioritize loss aversion and secure stability, did not yield the most optimal outcome in terms of business and financial management.

After analyzing the ship financing case of A Shipping Company, it was found that the background and causes of the ship financing decision made by the company can be explained by behavioral finance theories.

The finance decision-maker of A Shipping Company predicted that the financial market would normalize within two-three years. The interest rate fell within two to three years at the time of negotiations in 2009. However, instead of choosing a short-term loan with a relatively low interest rate, the company proceeded with a 5-year ship loan with a high interest rate. Despite high interest rates, A Shipping, which experienced financial market collapse after the Lehman crisis and the impossibility of procuring ship finance, chose 5-year maturity rather than short-term finance to avoid losses due to the impossibility of refinancing. However, since 2010, the financial market has normalized, and the USD and KRW interest rates on loans fell rapidly. Ultimately, the company has continuously requested prepayment from the KPSF since 2012 (Kim, 2016; Kwak, 2014; Seong, 2016; Shipping Daily, 2014).

Suppose A Shipping Company proceeded with short-term financing for two to three years, as recommended by ship financing institutions, considering the abnormally elevated interest rate level after the Lehman crisis. In this case, the company could have saved interest expenses of at least 3% per annum since 2011. The five-year ship financing that A Shipping executed in 2009 was hardly rational and not the best decision given the circumstances. These decision-making backgrounds and processes are explained by behavioral finance theories, such as the availability heuristic, loss aversion, and certainty effect, as mentioned by behavioral finance scholars.

In ship financing, if the interest rate of loans is abnormally high, unlike in a normal financial markets, it is generally recommended that short-term financing be executed and the loan refined after the interest rate stabilizes. It is also recommended that interest expenditures and financial costs be normalized to reduce them. As shown in [Fig. 1], when the interest rate is abnormally high owing to an external shock, it stabilizes rapidly. This decision-making is consistent with the rational human, efficiency maximization, and profit maximization asserted in traditional economics.

Similar to the analysis of narrative responses, behavioral finance theories clearly explained the analysis of questionnaire responses. In the case of abnormal financial market conditions and the assumption that the funding rate is abnormally high, 58.9% of all the survey respondents chose to execute short-term financing. However, when the information that financing was almost impossible during the past three years was provided, the number of respondents who chose short-term financing decreased to 39.3% in Questionnaire 2. The below [Table 5] shows the results of the survey.

Suppose that the interest rate is abnormally high because the financial market is abnormal. In this case, it is necessary to reduce the interest expenses for ship finance by executing refinancing when the financial market normalizes after the procurement of short-term financing instead of mid-to-long-term financing. However, owing to the psychological tendency of human beings to avoid loss and seek certainty, decision-makers cannot maximize benefit when making decisions about the repayment period of ship finance.

In addition, difficult situations related to past shipping financing experience have a significant impact on current decision-making. Managers are more likely to procure mid -or long-term finance than short-term finance when interest rates are abnormally high due to unstable financial markets. This is because of the effects of loss aversion, certainty effect, and availability heuristics mentioned in behavioral finance theory. It has been confirmed that the psychological factors mentioned by behavioral finance scholars have a direct influence on ship finance decision-making.

The distinctive thing is that no respondents from the ship financial institutions chose long-term financing in Questionnaire 1, and 76.2% of respondents chose short-term financing in the case of ship financial institution workers. In Questionnaire 2, 47.6% of respondents from ship financial institutions chose short-term financing, which is higher than the 39.3% of respondents who chose short-term financing among all respondents. It can be inferred that financial industry workers are more sensitive to interest rate level and loan term setting.

Under the assumption of abnormal financial market conditions, a questionnaire survey on the choice of refinancing maturity for ships was conducted. The above [Fig. 2] shows the results. In Questionnaire 1, 58.9% of all survey respondents chose to execute short-term refinancing under financial market conditions with abnormally high interest rates, 33.9% chose medium-term refinancing, and 7.1% chose long-term refinancing. It can be seen that the results of these survey responses are not very different from the interpretation of traditional economics. In Questionnaire 2, additional information to Questionnaire 1 was provided. When financial market information, which was very difficult to obtain in the past, was provided, the choice of refinancing period of all survey respondents changed. Those who chose short-term financing decreased to 39.3%, those who chose medium-term financing increased to 37.5%, and those who chose long-term financing increased to 23.2%.

According to the above survey test results on the choice differences between the test respondents of Questionnaires 1 and 2, the difference between the two proportions indicated a Z-score of 2.0791 and p-value of 0.0189. At a 5% significance level, the test results demonstrated a Z-score larger than Z_0.05=1.645, rejecting H₀, as well as a p-value of 0.0189, which is smaller than α=0.05, eliminating the null hypothesis of H₀.

Additionally, according to Fisher’s exact test, the results indicated a p-value of 0.0290, smaller than α=0.05, thus rejecting the null hypothesis of H₀. Therefore, with the results of both the two-proportion Z-test at the 5% significance level and Fisher’s exact test, it can be concluded that there are choice differences among the survey respondents concerning questionnaires 1 and 2 in the survey.

As past financial market information was provided, survey respondents changed their choice of maturity in ship finance. In other words, the number of survey respondents who changed their decision-making from short-term financing to medium-to-long-term financing increased.

In contrast, an interesting result was found by comparing the results of the survey responses to Questionnaire 1 regarding the selection of financing periods among employees of each institution. As shown in [Fig. 3], most employees of shipping financial institutions responded that they would execute short-term refinancing when interest rates were abnormally high. However, the responses of the shipping company workers differed. In addition, none of the employees of ship-financial institutions chose to procure long-term ship financing in response to Questionnaire 1.

According to the above [Table 7] which are statistical test results on the choice differences in the selection of short-term ship financing in Questionnaire 1 between workers from financial institutions and shipping companies, the difference in the proportions indicated a Z-score of 1.5991 and a p-value of 0.0559. In the case of a 5% significance level, the test results indicated a Z-score smaller than Z_0.05=1.645, thus accepting H₀; as well as a p-value of 0.0559, which is larger than α=0.05, thus accepting the null hypothesis of H₀. Therefore, it can be determined that there is no choice difference between workers in the two groups at the 5% significance level. Nevertheless, the test at the 10% significance level confirms the differences in decision-making between the workers of the two groups.

According to the above [Table 8] which are statistical test results on the choice differences between short- and medium-term financing and long-term financing in Questionnaire 1 of the survey between workers from financial institutions and shipping companies, the difference between the two proportions indicated a Z-score of 2.6027 and a p-value of 0.0047. In the case of a 5% significance level, the test results indicated a Z-score larger than Z_0.05 =1.645, thus rejecting H₀; as well as a p-value of 0.0047, which is smaller than α=0.05, thus eliminating the null hypothesis of H₀. Therefore, it can be determined that there are choice differences between the workers in the two groups at the 5% significance level. In addition, according to Fisher’s exact test, the p-value was 0.0191, which was smaller than α=0.05. Therefore, the null hypothesis was rejected.

As shown in the above [Fig. 4], the responses to Questionnaire 2 for financial institutions and shipping companies were also different from those of Questionnaire 1. After information about past problems with financial procurement was provided, the choice of short-term financing by ship financial institution workers decreased significantly, from 76.2% to 47.6%. The choice of short-term procurement financing among shipping company employees also decreased from 50% to 42.9%.

Behavioral finance scholars argue that humans use the availability heuristic, certainty effect, and loss aversion in decision-making. As stressed by Kliger and Kudryavtsev (2010), people tend to use their past experiences in decision-making. Hertwig et al. (2004) argued that people make decisions based on the experiences gained in recent events. In particular, they contend that people tend to make decisions based on their recent experience in uncertain situations. Meng and Weng (2018) argue that loss aversion directly influences decision-making. Dimmock and Kouwenberg (2010) also stress that decision makers adopt loss-aversion strategies. In addition, Baghestani (2019) argues that people care more about bad situations.

It is judged that the survey respondents’ decision-making fits these theories of behavioral finance. When the financing rate is high in an abnormal financial market situation, it is reasonable to execute short-term financing with a relatively lower interest rate, rather than medium- to long-term financing, and then proceed with refinancing when the interest rate normalizes. Thus, 58.9% of all respondents chose short-term financing in Questionnaire 1. However, only 39.3% of the survey respondents chose short-term financing in Questionnaire 2 because information on past and recent financial markets was provided. Among the survey respondents, 60.7% chose medium-and long-term financing to secure stable funding without the risk that financing would not be possible within a short period. The survey results confirmed that decision-making changes according to the given information and past experiences. These results demonstrate all the theories of loss aversion, certainty effect, and availability heuristic asserted by behavioral finance scholars.