Investor Regret and Stock Returns

Y. Eser Arisoy (), Turan G. Bali () and Yi Tang ()
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Y. Eser Arisoy: Department of Finance, NEOMA Business School, 51100 Reims, France
Turan G. Bali: Department of Finance, McDonough School of Business, Georgetown University, Washington, District of Columbia 20057
Yi Tang: Finance and Business Economics Area, Gabelli School of Business, Fordham University, New York, New York 10023

Management Science, 2024, vol. 70, issue 11, 7537-7558

Abstract: We introduce a measure of regret for stock market investors and investigate its cross-sectional asset pricing implications. According to our regret-based framework, investors experience regret due to not achieving the highest possible return from a similar set of stock investments, and equity portfolios with high regret generate 6.84% more annualized alpha than portfolios with low regret. Using investor-trading activity of 78,000 households at a large U.S.-based brokerage firm, we develop an investor-based regret index and show that this household-level regret measure predicts stock returns in a similar way to our proposed regret measure. We also show that regret is not spanned by established risk or behavioral factors that have been documented to be robust predictors of equity returns.

Keywords: regret theory; equity returns; investor sophistication; household trading; informational frictions; limits-to-arbitrage; costly arbitrage (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:70:y:2024:i:11:p:7537-7558

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