Dynamic Regret Avoidance

Abstract

In a stock market experiment we examine how regret avoidance influences the decision to sell an asset while its price changes over time. Participants know beforehand whether they will observe the future prices after they sell the asset or not. Without future prices participants are affected only by regret about previously observed high prices (past regret), but, when future prices are available, they also avoid regret about expected after-sale high prices (future regret). Moreover, as the relative sizes of past and future regret change, participants dynamically switch between them. This demonstrates how multiple reference points dynamically influence sales.

Keywords: stock market behavior, behavioral finance, regret avoidance, dynamic regret, dynamic discrete choice, structural models, experiments, multiple reference points

JEL Classification: C91, D91