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

36 Pages Posted: 23 Nov 2020

See all articles by Julia Brettschneider

Julia Brettschneider

University of Warwick

Giovanni Burro

Bocconi University and IGIER

Vicky Henderson

University of Warwick

Date Written: October 5, 2020

Abstract

Using a dynamic extension of Regret Theory, we test how the regret induced by not selling a stock when the maximum price in an investment episode is attained shapes the propensity to sell a stock. We use a large discount brokerage dataset containing US households’ trading records between 1991 and 1996. Expected utility predicts that investors should stop at a threshold, whilst a Regret agent does not necessarily stop there. We observe that investors do not follow a threshold strategy in our data. Only 31.6% of the gains are sold on the day when the maximum is attained and 25.8% of the losses are sold on the day when the minimum is attained. We find that more sophisticated and younger investors are more likely to follow a threshold strategy. Second, we find that investors are more likely to sell a stock for a gain in a moment closer in time to the maximum occurrence and at a price further from the running maximum price of the stock in the investment episode. Anticipated regret and belief updating might explain this pattern. The propensity to sell a gain steadily declines a short time after the maximum was attained. We suggest that traders might regret not selling at a time close to the maximum day and hold onto the stock if a long time has passed.

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). Available at SSRN: https://ssrn.com/abstract=3705223 or http://dx.doi.org/10.2139/ssrn.3705223

Julia Brettschneider

University of Warwick ( email )

Gibbet Hill Rd.
Coventry, West Midlands CV4 8UW
United Kingdom

Giovanni Burro (Contact Author)

Bocconi University and IGIER ( email )

via Roentgen 1
Milano, Milano 20136
Italy

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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