Participants took part in a computer-based experiment where they repeatedly played an asset-selling game. They observed a stock price over time – like on a ticker tape – and could decide to either sell at the current price or to hold out for a better one.Stockbrokers of the world, take note;
The behaviour of the participants over multiple rounds of the same task was fairly erratic. Contrary to the predictions made by expected utility and prospect theory, the price at which they sold clearly wasn’t stable over rounds. Instead, participants were generally reluctant to stop anywhere appreciably below the historical peak of the price series. Since the historical peak that subjects saw was different over the rounds, this helps explain the way they changed their mind between rounds. Data analysis confirms that the price at which stock was sold is systematically related to the past peak. Our estimates suggest that this makes subjects willing to gamble, on average, for prices up to 24% higher than initially planned.
...our work shows that regret aversion and counterfactual thinking make subtle predictions about behaviour in settings where past events serve as benchmarks. They are most vividly illustrated in the investment context.Where people may simply refuse to enter into investing because,
...anticipated regret aversion acts like a surrogate for higher risk aversion.Or, when they have invested;
... they become very attached to their investment. Moreover, the better past performance was, the higher their commitment, because losses loom larger. This leads the investor to ‘gamble for resurrection’. In our experimental data, we very often observe exactly this pattern.As have many investment professionals (aka, salesmen).