Too Proud to Stop: Regret in Dynamic Decisions

Paul Viefers and Philipp Strack ()

No 1401, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: Many economic situations involve the timing of irreversible decisions. E.g. People decide when to sell a stock or stop searching for a better price. We analyze the behavior of a decision maker who evaluates his choice relative to the ex-post optimal choice in an optimal stopping task. We derive the optimal strategy under such regret preferences, and show how it is different from that of an expected utility maximizer. We also show that if the decision maker never commits mistakes the behavior resulting from this strategy is observationally equivalent to that of an expected utility maximizer. We then test our theoretical predictions in the laboratory. The results from a structural discrete choice model we fit to our data provide strong evidence that many people's stopping behavior is largely determined by the anticipation of and aversion to regret.

Keywords: Optimal stopping; Dynamic behavior; Regret (search for similar items in EconPapers)
JEL-codes: C91 D3 (search for similar items in EconPapers)
Pages: 46 p.
Date: 2014
New Economics Papers: this item is included in nep-dcm, nep-evo, nep-exp, nep-mic, nep-neu and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Journal Article: Too Proud to Stop: Regret in Dynamic Decisions (2021)
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