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

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