Too Proud to Stop: Regret in Dynamic Decisions

62 Pages Posted: 29 Jul 2014 Last revised: 6 Jul 2017

See all articles by Paul Viefers

Paul Viefers

A.T. Kearney GmbH

Philipp Strack

Yale, Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2014

Abstract

Many economic situations involve the timing of irreversible decisions. E.g. People decide when to sell a stock or stop searching for a better price. We analyze the behavior of a decision maker who evaluates his choice relative to the ex-post optimal choice in an optimal stopping task. We derive the optimal strategy under such regret preferences, and show how it is different from that of an expected utility maximizer. We also show that if the decision maker never commits mistakes the behavior resulting from this strategy is observationally equivalent to that of an expected utility maximizer. We then test our theoretical predictions in the laboratory. The results from a structural discrete choice model we fit to our data provide strong evidence that many people's stopping behavior is largely determined by the anticipation of and aversion to regret.

Keywords: Optimal stopping, Dynamic behavior, Regret

JEL Classification: D03, C91

Suggested Citation

Viefers, Paul and Strack, Philipp, Too Proud to Stop: Regret in Dynamic Decisions (July 1, 2014). DIW Berlin Discussion Paper No. 1401, Available at SSRN: https://ssrn.com/abstract=2473538 or http://dx.doi.org/10.2139/ssrn.2473538

Paul Viefers (Contact Author)

A.T. Kearney GmbH ( email )

Dreischeibenhaus 1
Düsseldorf, Deutschland (DEU) 40211
Germany

Philipp Strack

Yale, Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States

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