Relationship between Investor's Regret Aversion and Stock Returns

Abstract

This study analyzes the impact of investor regret and regret aversion on stock returns from a behavioral finance perspective. Regret occurs when investors compare the outcomes of their choices with alternative outcomes. Assets with returns lower than the highest potential return achievable within the same period are defined as assets causing significant regret for investors. Such assets, causing either high or low regret, influence investor demand. Investors tend to avoid adding assets with high regret to their portfolios, and demand additional compensation to hold them. Conversely, investors prefer assets with lower regret, and are willing to accept relatively lower returns. This study utilizes the regret variables proposed by Arisoy et al. (2024) to examine the existence of regret aversion and regret premiums in Korean stock markets, along with their impact on asset pricing. It investigates the relationships with variables such as individual investors’ trading volume, disposition effect, and psychological price barriers, while analyzing periods when regret aversion intensifies, considering market conditions and dynamics. This study contributes to the empirical analysis of regret aversion in the Korean stock market. Moreover, it enhances the understanding of investor decision-making and asset pricing.