Giovanni Burro (University of Warwick) on "Sky's the limit: an empirical investigation of maximum price and its effect on regret and trading decisions"

Speaker:  Giovanni Burro - University of Warwick
  Wednesday, June 26, 2019 at 12:00 PM Polo Santa Marta, Via Cantarane 24, Sala Vaona
Sky's the limit: an empirical investigation of maximum price and its effect on regret and trading decisions
Julia Brettschneider, Giovanni Burro and Vicky Henderson

We carry out an empirical test of Regret Theory in dynamic financial decisions, using trading data from the LDB dataset (Barber and Odean, 2013). Following theoretical predictions and a laboratory test of Strack and Viefers (2017, SV), we apply their approach to field data. In their work, SV show that the optimal strategy for an Expected Utility maximiser is to stop at a threshold. This implies that investors would not sell a stock at a price already seen. SV also claim that regret increases with distance between the running maximum price over the whole investment period and the current price, and that regret inhibits selling. Subjects do not follow threshold strategy in a laboratory setting.

Focusing on trades which span less than a year, we find that most of our sample investors do not follow a threshold strategy. We check if investors follow a threshold strategy in the gain and in the loss domain. We check if investments and individual features influence the propensity to follow it. Our main finding in this section is that longer trades are associated with a lower consistency with a threshold strategy both in the gain and in the loss domain. Investors probably gamble for rebound of the stock. We control for differences due to age, category of investor and type of bank account, too.

Most importantly, we analyse the impact of maximum price level and temporal distance from the maximum on the propensity to sell a stock for a gain. We find that investors are more likely to sell a stock when temporally closer to the maximum and when the price is further from the running maximum. The effect of temporal distance is the most relevant in shaping regret, with respect to the effect of price distance.

Programme Director
Alessandro Bucciol

Publication date
March 25, 2019