Make Hay While the Sun Shines: An Empirical Study of Maximum Price, Regret and Trading Decisions

forthcoming the Journal of the European Economic Association

44 Pages Posted: 23 Nov 2020 Last revised: 20 Feb 2024

See all articles by Julia Brettschneider

Julia Brettschneider

University of Warwick - Department of Statistics

Giovanni Burro

Heidelberg University - Alfred Weber Institute for Economics

Vicky Henderson

University of Warwick

Date Written: October 5, 2020

Abstract

Time-constant trading thresholds are optimal for a large class of preferences and asset price dynamics, including Expected Utility and the S-shaped reference-dependent utility of Prospect Theory. Such thresholds imply selling stocks at the maximum price since purchase. We use a large discount brokerage dataset containing US households' trading records between 1991 and 1996 to document that in 31.6% of cases the stocks sold for a gain are sold on the day when the maximum since purchase occurs. However, not all stocks are sold at a maximum since purchase and the propensity to sell changes depending on how far in time and price the stock is with respect to this past maximum. We
find that the propensity to sell initially increases as the price is closer to the past maximum but it then decreases when the price gets in the closest region to the past maximum, leading to an inverse U-shape; and that investors are less likely to sell a gain, the further away in time the maximum price occurred. Studying the joint effect of price and time distance, we find that the propensity to sell is highest at low time distance and high price distance from the maximum since purchase. We relate these findings to regret, belief updating, and attention.

Keywords: Regret Theory, Trading, Threshold, Maximum Price

JEL Classification: C55, D90, G40

Suggested Citation

Brettschneider, Julia and Burro, Giovanni and Henderson, Vicky, Make Hay While the Sun Shines: An Empirical Study of Maximum Price, Regret and Trading Decisions (October 5, 2020). forthcoming the Journal of the European Economic Association, Available at SSRN: https://ssrn.com/abstract=3705223 or http://dx.doi.org/10.2139/ssrn.3705223

Julia Brettschneider

University of Warwick - Department of Statistics ( email )

Giovanni Burro (Contact Author)

Heidelberg University - Alfred Weber Institute for Economics

Bergheimer Str. 58
Heidelberg, 69115
Germany

Vicky Henderson

University of Warwick ( email )

Gibbet Hill Rd.
Coventry, West Midlands CV4 8UW
United Kingdom
44 (0)2476 574811 (Phone)

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