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Neural Evidence of Regret and Its Implications for Investor Behavior

Review of Financial Studies, Forthcoming

Marshall School of Business Working Paper No. FBE 02.16

59 Pages Posted: 30 Apr 2015 Last revised: 12 Apr 2016

Cary Frydman

University of Southern California - Marshall School of Business

Colin Camerer

California Institute of Technology - Division of the Humanities and Social Sciences

Date Written: April 28, 2015

Abstract

We use neural data collected from an experimental asset market to measure regret preferences while subjects trade stocks. When subjects observe a positive return for a stock they chose not to purchase, a regret signal is observed in an area of the brain that is commonly active during reward processing. Subjects are unwilling to repurchase stocks that have recently increased in price, even though this is suboptimal in our experiment. The strength of stock repurchasing mistakes is correlated with the neural measures of regret. Subjects with high rates of repurchasing mistakes also exhibit large disposition effects.

Keywords: investor behavior, neurofinance, behavioral finance, regret, repurchase effect, disposition effect

JEL Classification: G02, G11

Suggested Citation

Frydman, Cary and Camerer, Colin, Neural Evidence of Regret and Its Implications for Investor Behavior (April 28, 2015). Review of Financial Studies, Forthcoming; Marshall School of Business Working Paper No. FBE 02.16. Available at SSRN: https://ssrn.com/abstract=2600287 or http://dx.doi.org/10.2139/ssrn.2600287

Cary Frydman (Contact Author)

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

Colin Camerer

California Institute of Technology - Division of the Humanities and Social Sciences ( email )

1200 East California Blvd.
Pasadena, CA 91125
United States
626-395-4054 (Phone)
626-432-1726 (Fax)

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