Emotions, not facts, drive investors to sell

UC DAVIS (US) — Regret and pride guide stock investors more than economic facts—often to their financial detriment—a new study shows.

“Having sold a stock, investors are disappointed if it continues to rise, and regret having sold it in the first place,” says Brad Barber, a professor in the Graduate School of Management at the University of California, Davis. “They anticipate that their disappointment and regret will be more intense if they repurchase such a stock rather than not repurchasing it; thus investors are most likely to repurchase a stock previously sold for a gain that is trading below the price at which they sold it.”


Barber and colleagues analyzed trading records for 66,465 U.S. households with accounts at a large discount broker between January 1991 and November 1996 and another 596,314 U.S. investors with accounts at a large retail broker between January 1997 and June 1999.

The analysis suggests investors often make decisions based on emotions such as regret, disappointment, pride and contentment. Findings are scheduled for publication in the Journal of Marketing Research.

The researchers looked at each day an investor made a stock purchase and whether the investor had sold those same stocks for a gain or loss during the previous 252 trading days. The team found that investors not only prefer to re-buy a stock that was profitable in the past, but they are also more likely to buy such a stock if it lost value after they sold it.

All behaviors were consistent with what the researchers term “counterfactual thinking”—looking back at what could have been—and suggest that investors are motivated by a desire to avoid regret and instead feel pride.

“If the stock market were a level playing field and trading were costless, one might argue that the ability to enhance the emotional experience of investing by timing one’s repurchases in a way that feels good is welfare increasing,” the researchers conclude.

“However, the enhanced emotional experience often will come with a price tag for two distinct reasons: the playing field is not level—on average institutional investors gain through trading and individuals lose. Furthermore, due to commissions and other transaction costs, trading is costly.”

Co-authors on the study include researchers at the University of California, Berkeley, and Golden Gate University.

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