Too Proud to Stop: Regret in Dynamic Decisions
62 Pages Posted: 15 Jul 2014 Last revised: 8 Jul 2017
Date Written: September 24, 2013
Regret and its anticipation affect a wide range of decisions. Jobseekers reject offers 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 a payoff matching the best past offer is received. 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