Tendency for people to make decisions in order to avoid feeling regret in the future.
Loomes, G., & Sugden, R. (1982). Regret theory: An alternative theory of rational choice under uncertainty. Economic Journal, 92(368), 805–824.
1. Suppose you invest in company A’s stock and over the next 12 months the stock price appreciates by 10 percent. You contemplate selling stock A for normal portfolio rebalancing purpose, but then come across positive news about the company in the economic daily. It is mentioned that the stock price has a chance to increase further in the near future.
What answer describes your likeliest response in this situation?
a. I think I'll hold off and sell later. I'd really kick myself if I sold now and stock A continued to go up. (1)
b. I'll probably sell. But I'll still kick myself if stock A appreciates later on. (1)
c. I'll probably sell the stock without any second thoughts, regardless of what happens to the performance of the stock later. (0)
2. Suppose you have decided to invest 1 million TWD in the stock market. You have narrowed your choices down to two companies: one Big Company, Inc, and one Small Company, Inc. According to your calculations, the two companies have equal risk and return characteristics. Big company is a well-followed, eminently established company, whose investors include many large pension funds. Small company has only a few well-known investors. What answer most closely matches your action in this situation?
a. I will mostly likely invest in Big Company because I feel safe taking the same course as so many well-known institutional investors. If Big Company does decline in value, I could hardly blame myself for the wrong decision (1).
b. I will most likely invest in Big Company because if I invested in Small Company and its stock price declines in value, I would feel like a fool and I would really regret it. (1)
c. I would basically feel indifferent between the two investments, since both generated the same expected risk and return. (0)
3. Suppose you've decided to acquire 10 shares of Company B. You purchase five shares now at 30 TWD and plan to wait a few days before picking up the additional five. Further suppose that soon after your initial buy, the stock is now trading at 28 TWD, with no change in fundamentals. Which answer mostly closely matches your response in this situation?
a. I will wait until the stock price rises before I continue to buy, because I don't want to see the stock price fall, which would mean that my original investment had been wrong. (1)
b. I will continue to buy the remaining five, but I will regret it if the stock price continues to fall. (1)
c. I will continue to buy the remaining five, and even if the stock price continues to fall, I will not regret it too much. (0)
Each option is associated with a given number of points and the total score is the sum of the responses.
Pompian, M. M. (2011). Behavioral finance and wealth management: How to build optimal portfolios that account for investor biases. New Jersey: John Wiley & Sons, Inc.
Rieger, M. O., Wang, M., Huang, P.-K., & Hsu, Y.-L. (2022). Survey evidence on core factors of behavioral biases. Journal of Behavioral and Experimental Economics, 101912.