The role of regret in the persistence of anomalies in financial markets (In French)

Emmanuel Petit ()

Cahiers du GREThA (2007-2019) from Groupe de Recherche en Economie Théorique et Appliquée (GREThA)

Abstract: In this article, we provide a unified framework which can take into account numerous behavioural anomalies observed in financial markets (disposition effect, under- and overreaction phenomena and so on). Our general theoretical framework uses both cognitive and perceptual theories of emotion. Defining the emotion as a revision process of beliefs and preferences (Livet (2002)), we explain the role of regret in the occurrence and the persistence of many psychological biases recently identified in financial markets (rationalization, conservatism, hindsight and confirmatory biases, etcetera). Specifically, the tendency to sell superior-performing stocks too early (Shefrin and Statman (1985)) is a direct consequence of the investor incapacity of revising a strong false (however protected) belief which appears to sustain crucially his self-confidence. This cognitive resistance towards the emotional process highlights the importance of the individual and social control of the emotions.

Keywords: Regret; theory of emotions; disposition effect; behavioural finance (search for similar items in EconPapers)
JEL-codes: A12 G10 (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-hpe and nep-neu
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Persistent link: https://EconPapers.repec.org/RePEc:grt:wpegrt:2010-07

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