Too Proud to Stop: Regret in Dynamic Decisions
69 Pages Posted: 15 Jul 2014 Last revised: 23 Sep 2019
Date Written: September 24, 2013
Regret and its anticipation aﬀect a wide range of decisions. Job-seekers reject oﬀers while waiting for an oﬀer to match their best past oﬀer; investors hold on to badly performing stocks; and managers throw good money after bad projects. We analyze behavior of a decision-maker with regret preferences in a dynamic context and show that regret agents have a disposition to gamble until they receive a payoﬀ matching the best past oﬀer. Results from a lab experiment conﬁrm that many subjects exhibit such behavior and are reluctant to stop below the past peak.
Keywords: Optimal stopping, Dynamic behavior, Regret
JEL Classification: D03, C91
Suggested Citation: Suggested Citation