Abstract

http://ssrn.com/abstract=611267
 
 

References (30)



 
 

Citations (11)



 


 



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


Terrance Odean


University of California, Berkeley - Haas School of Business

Michal Ann Strahilevitz


Golden Gate University - Ageno School of Business

Brad M. Barber


University of California, Davis

July 31, 2010


Abstract:     
We establish two previously undocumented patterns in the purchase selections of individual investors. These patterns hinge on investors’ previous experiences with a stock. We demonstrate that investors prefer to (1) repurchase stocks they previously sold for a gain rather than stocks they previously sold for a loss and (2) repurchase stocks that have lost value subsequent to a prior sale rather than those that have gained value. We document these trading patterns by analyzing trading records for 66,465 households at a large discount broker between January 1991 and November 1996, and 665,533 investors at a large retail broker between January 1997 and June 1999. We propose that the first trading pattern results from a simple form of learning whereby investors repeat actions that previously resulted in pleasure while avoiding actions that previously led to pain (i.e., they repurchase their previous winners more readily than their previous losers). We argue that the second trading pattern is tied to counterfactuals. Investors who buy a stock at a higher price than they previously sold it for are painfully aware that they are worse off than if they had simply never sold that stock. Investors who buy a stock at a lower price than they previously sold it experience the pleasure of knowing they are better off than if they had never sold that stock. Investor returns do not benefit from either of the two patterns we document.

Number of Pages in PDF File: 42

Keywords: Behavioral finance, prospect theory, disposition effect, individual investors

JEL Classification: G11, D1

working papers series


Download This Paper

Date posted: September 16, 2005 ; Last revised: August 7, 2010

Suggested Citation

Odean, Terrance and Strahilevitz, Michal Ann and Barber, Brad M., Once Burned, Twice Shy: How Naïve Learning, Counterfactuals, and Regret Affect the Repurchase of Stocks Previously Sold (July 31, 2010). Available at SSRN: http://ssrn.com/abstract=611267 or http://dx.doi.org/10.2139/ssrn.611267

Contact Information

Terrance Odean (Contact Author)
University of California, Berkeley - Haas School of Business ( email )
545 Student Services Building
Berkeley, CA 94720
United States
510-642-6767 (Phone)
510-666-2561 (Fax)
HOME PAGE: http://www.haas.berkeley.edu/faculty/odean.html
Michal Ann Strahilevitz
Golden Gate University - Ageno School of Business ( email )
536 Mission Street
San Francisco, CA 94105
United States
415-442-7877 (Phone)
HOME PAGE: http://www.ggu.edu/about/faculty/faculty_directory/michal_ann_strahilevitz
Brad M. Barber
University of California, Davis ( email )
Graduate School of Management
One Shields Avenue
Davis, CA 95616
United States
530-752-0512 (Phone)
530-752-2924 (Fax)
Feedback to SSRN


Paper statistics
Abstract Views: 3,756
Downloads: 651
Download Rank: 20,263
References:  30
Citations:  11

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo2 in 0.484 seconds