Theoretical and empirical work on individual decision-making in the context of organized commodity markets has mostly assumed that individual economic agents behave as if they pursue the aim of maximum expected utility (e.g. Stein 1961, 1964; Johnson 1960; Ward and Fletcher 1971; Rutledge 1972). For the reader who believes that individuals do not maximize expected utility because of inadequate information, inability to distinguish local from global maxima, utility functions which do not permit maximization, or for some other reason, and for the reader who finds the aim of maximum expected utility introspectively unsatisfactory, this paper presents an alternative non-maximizing approach.

The main determinants of the individual economic agent’s market position are his expectations of the relevant variable relating to the commodity in which he is trading, his attitude toward risk and his decision rule. The paper considers first the case of an individual speculator, who is assumed risk averse in a sense to be defined, and secondly the case of a discretionary hedger who combines both hedging and speculative elements, and who may be either a carrying-charge or selective hedger in the sense of Working (1953). It will be seen that conventional results, as regards the nature of the trader’s supply and demand functions and with respect to certain parameter changes, are obtained by a route alternative to that of utility maximization, although a formal comparison between the two approaches is the subject of a separate paper. For the benefit of the non-specialist reader we begin with a brief review of the literature on speculation in commodity futures markets.