Once Burned, Twice Shy: How Naive Learning, Counterfactuals, and Regret Affect the Repurchase of Stocks Previously Sold

Abstract

Investors’ previous experiences with a stock affect their willingness to repurchase that stock. Using detailed trade data from two brokers, the authors document that investors are reluctant to repurchase stocks previously sold for a loss and stocks that have risen in price subsequent to a prior sale. The authors propose that this behavior reflects investors’ emotional reactions to trading and their attempts to distance themselves from negative emotions (e.g., disappointment, regret). Investors are disappointed when they sell a stock for a loss and regret having ever purchased the stock; these negative emotions deter investors from later repurchasing stocks they sold for a loss. Having sold a stock, investors are disappointed if the stock continues to rise and regret having sold the stock in the first place; these negative emotions deter investors from repurchasing stocks that go up since being sold. Thus, investors engage in reinforcement learning by repurchasing stocks whose previous purchase resulted in positive emotions and avoiding stocks whose previous purchase resulted in negative emotions.

Consumer Preferences for Annuity Attributes: Beyond Net Present Value

“…The most complex decision of all, however, is how to optimally spend down saved assets. In the growing body of research on consumer financial decision making (Lynch 2011), the emphasis is often on the accumulation stage of wealth management, addressing issues such as retirement savings decisions (Soman andCheema 2011, Hershfield et al 2011) or investment choice (Strahilevitz, Odean, and Barber 2011;Morrin et al 2012).…”

Looking for Someone to Blame: Delegation, Cognitive Dissonance, and the Disposition Effect

“…Finally, cognitive dissonance provides a potential explanation for the result in Strahilevitz et al (2011) that investors are reluctant to re-purchase stocks that have risen in price since the previous sale. Strahilevitz et al (2011) argue that this is due to investor regret over the previous decision to sell, and an avoidance of assets that generated previous negative emotions.…”

Random regret minimization for consumer choice modeling: Assessment of empirical evidence

“…Roughly speaking, two strands of related literature in the marketing research domain can be distinguished 2 : a first body of literature (e.g., Simonson, 1992;Taylor, 1997;Spears, 2006;Strahilevitz et al, 2012) develops conceptual models that usually take the form of a series of hypotheses, which are subsequently tested based on data collected by means of questionnaires or behavioral experiments. A second body of literature (Hey & Orme, 1994;Inman et al, 1997;Bleichrodt et al, 2010;Chen & Jia, 2012) adopts a more formal perspective as it proposes and empirically tests mathematical models of regret-based decision making, usually inspired by the seminal Regret Theory proposed in the early 1980s (Loomes & Sugden, 1982;Bell, 1982, Fishburn, 1982.…”