The Follow-On Purchase and Repurchase Behavior of Individual Investors: An Experimental Investigation

Die Betriebswirtschaft, Vol. 71, pp. 139-154, 2011

37 Pages Posted: 20 Oct 2007 Last revised: 21 May 2014

See all articles by Martin Weber

Martin Weber

University of Mannheim - Department of Banking and Finance

Frank Welfens

University of Mannheim

Abstract

We analyze two recently documented follow-on purchase and repurchase patterns experimentally: Individual investors' preference for purchasing additional shares of a stock that decreased rather than increased in value succeeding an initial purchase (pattern 1) and investors' tendency for purchasing stocks that they previously sold at a higher price (pattern 2). Similar to the field data study by Odean, Strahilevitz, and Barber (2004), subjects in our experiment are about 2.5 to 3 times as likely to purchase units of a single fictitious good if the price of the good declined following a purchase or sale in the previous period. As an assignment of choices clearly reduces the effect, we argue that investors are involved in counterfactual thinking: They refrain from purchasing additional shares or repurchasing shares at a higher price because doing so means admitting to their ex post wrong decision.

Keywords: Repurchase, Counterfactual Thinking, Experiment

JEL Classification: C91, D14, D81, G11

Suggested Citation

Weber, Martin and Welfens, Frank, The Follow-On Purchase and Repurchase Behavior of Individual Investors: An Experimental Investigation. Die Betriebswirtschaft, Vol. 71, pp. 139-154, 2011. Available at SSRN: https://ssrn.com/abstract=1022927

Martin Weber

University of Mannheim - Department of Banking and Finance ( email )

D-68131 Mannheim
Germany
+49 621 181 1532 (Phone)
+49 621 181 1534 (Fax)

Frank Welfens (Contact Author)

University of Mannheim ( email )

D-68131 Mannheim
Germany
+49 621 181 1539 (Phone)
+49 621 181 1534 (Fax)

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