Regret Aversion Research Articles

ROLE OF REGRET AVERSION AND LOSS AVERSION EMOTIONAL BIASES IN DETERMINING INDIVIDUAL INVESTORS’ TRADING FREQUENCY: MODERATING EFFECTS OF RISK PERCEPTION

Purpose: This study aims to investigate the moderating effect of risk perception on the relationship among emotional biases (i.e., regret aversion and loss aversion) and the trading frequency of individual investors in the context of the Pakistan Stock Exchange (PSX).
 Approach / Methodology: This study is conducted under the philosophical assumptions of the positivist paradigm and the approach is deductive. The convenience sampling technique is used for sample selection of registered individual investors on the database of PSX. This led the study towards designing a cross-sectional study. Furthermore, 384 questionnaires are used for the collection of primary data from a population of 0.22 million registered PSX individual investors. The direction and degree of relationship among variables of concern are analyzed by the multiple linear regression techniques. The structural Equation Modelling (SEM) technique is used for authentication of moderation results.
 Findings: The results depict that regret aversion and loss aversion have statistically significant and negative impacts on individual investors’ trading frequency. Whereas, risk perception has an insignificant & positive impact on individual investors’ trading frequency. Moreover, risk perception is found to moderate the relationship between these two emotional behavioral biases.
 Originality/Value: This current study is a pioneer in developing links between individual investors’ trading frequency, loss aversion, regret aversion, and risk perception. The article also contributes to the literature of behavioral finance, specifically while understanding the role of emotional biases in investment strategies. So, this article engenders the reader's thoughtfulness to find plausible explanations in minimizing the impact of emotional biases in trading frequency and decision-making of individual investors.
 Implications: This study implies that emotional biases and risk perception cause and moderate the magnitude of the trading frequency of individual investors. The regulatory bodies such as the Securities and Exchange Commission of Pakistan (SECP) and PSX can launch training programs for individual investors to train them in coping up with such emotional biases and risk perception. This might result in the enhancement of the market capitalization of the stock market.

Is Awareness That Powerful? Women’s Financial Literacy Support to Prospects Behaviour in Prudent Decision-making

Financial literacy is of utmost relevance in the field of entrepreneurship, especially in developing countries. However, what builds financial literacy and how it shapes investment decision-making of women entrepreneurs is an exiguously researched area. Building on this gap, this study postulates that women entrepreneurs’ prospect behavioural factors (loss aversion, regret aversion, mental accounting, and self-control) impact their investment decision process through the intervening role of financial literacy. Based on a stratified sample of 579 women entrepreneurs operating in Punjab, Pakistan, structural equation modelling was used to analyse the hypothesized relationship among variables. Findings showed that loss aversion, regret aversion, mental accounting, and self-control significantly influenced women’s financial literacy and investment decision process, whereas no impact of regret aversion was traced on investment decision-making. Thus, our results offered robust support that financial literacy stimulated by women entrepreneurs’ prospect behaviour invigorates their investment decision power.

Behavioral factors affecting investment decision-making in bank stocks on the Ghana stock exchange

PurposeThe finance literature is awash with papers bordering on the classical assumption that investors are rational in their decision-making, and hence, would always take decisions rationally given the right information, thus making the stock market efficient. This assumption has, however, been found to be at least inadequate given the fact that investors are complex psychological beings full of emotions. This paper aims to investigate the psychological factors that tend to influence the decisions of investors.Design/methodology/approachThe study used a questionnaire to survey a total of 350 investors holding stocks of listed banks on the Ghana Stock Exchange (GSE).FindingsThe study found the existence of various behavioural biases among the investors surveyed. The most dominant factor or bias found to be influencing investment decisions of respondents was herding with nearly 62% weight. Again, biases such as regret aversion and gambler’s fallacy were also found to strongly influence the decisions of investors, along with mental accounting, overconfidence and anchoring.Practical implicationsThe presence of these behavioural biases, therefore suggests that investors do not always take rational decisions, and hence, making the stock market efficient and that as psychological beings, their investment decisions are impacted strongly by their psychology.Originality/valueThe study used a questionnaire to survey a total of 350 investors holding stocks of listed banks on the GSE with a special focus on overconfidence, anchoring, herding, gambler’s fallacy, mental accounting and regret aversion as the variables of interest, the first of its kind in Ghana.

Willingness to pay for reductions in health risks under anticipated regret

In this paper, we study the willingness to pay for reductions in health risks within a framework of anticipated regret. We show that ex post information provision can be a relevant factor for regret theory to account for why people are sometimes so inclined to protect themself against certain types of health risks but not others. In particular, we find that under full resolution of uncertainty disproportionate aversion to large regrets exaggerates willingness to pay estimates. The effect induced by this notion of regret aversion can be interpreted as if regret-averse people overweight risk reductions due to prevention. However, as feedback over forgone acts is missing, the regret aversion effect disappears. Finally, we show that information avoidance induced by regret aversion can significantly bias our evaluation to prefer those health programs that completely eliminate a risk, i.e., the certainty effect.

How a doer persuade a donor? Investigating the moderating effects of behavioral biases in donor acceptance of donation crowdfunding

PurposeThe concept of donation crowdfunding has been drawing enormous attention as it connects donors worldwide in a shorter time at a relatively lower cost. This paper aims to integrate two unified theories, namely, behavioral finance and unified theory of acceptance and use of technology model, to investigate on the motivators and deterrents that influence prospective donors to adopt and use donation crowdfunding. The study also substantiates the significance of donors’ behavioral biases through the moderating effect in the crowdfunding adoption process.Design/methodology/approachThe study used survey method for data collection and the data set was obtained from the sample of respondents belonging to India and Bangladesh. The proposed structural equation modeling is tested using SPSS 23.0 and AMOS 23.0.FindingsThe study reveals that performance expectancy, effort expectancy, facilitating conditions and trust significantly enhance the intention to adopt donation crowdfunding. Also, biases including overconfidence bias, herding bias and regret aversion bias are found to have significant moderating effects on the relationship between the behavioral intention to adopt donation crowdfunding and use behavior.Practical implicationsBy investigating motivators and deterrents of the adoption of donation crowdfunding, the study renders lucrative insights for the donation crowdfunders in devising a donation fundraising campaign that motivates the prospective donors to provide financial contribution.Originality/valueThe study establishes its novelty in explaining the adoption behavior of donation crowdfunding with behavioral bias moderators as a theoretical paradigm. Furthermore, the unified theory of acceptance and use of technology model is extended by introducing, the variable “trust,” while studying the adoption behavior of donation crowdfunding.

Consensus-Based Linguistic Distribution Large-Scale Group Decision Making Using Statistical Inference and Regret Theory.

Large-scale group decision-making (LSGDM) deals with complex decision- making problems which involve a large number of decision makers (DMs). Such a complex scenario leads to uncertain contexts in which DMs elicit their knowledge using linguistic information that can be modelled using different representations. However, current processes for solving LSGDM problems commonly neglect a key concept in many real-world decision-making problems, such as DMs’ regret aversion psychological behavior. Therefore, this paper introduces a novel consensus based linguistic distribution LSGDM (CLDLSGDM) approach based on a statistical inference principle that considers DMs’ regret aversion psychological characteristics using regret theory and which aims at obtaining agreed solutions. Specifically, the CLDLSGDM approach applies the statistical inference principle to the consensual information obtained in the consensus process, in order to derive the weights of DMs and attributes using the consensus matrix and adjusted decision-making matrices to solve the decision-making problem. Afterwards, by using regret theory, the comprehensive perceived utility values of alternatives are derived and their ranking determined. Finally, a performance evaluation of public hospitals in China is given as an example in order to illustrate the implementation of the designed method. The stability and advantages of the designed method are analyzed by a sensitivity and a comparative analysis.

The impacts of retailers' regret aversion on a random multi-period supply chain network

<p style='text-indent:20px;'>Most current studies on the equilibrium decision-makings of a supply chain network (SCN) consider only completely rational retailers who always try to maximize their expected profits under the situations that demands are random. However, many evidences show that a retailer wants to choose the decision-making involving random demand which provides him with minimum regret. In this paper, we consider the impacts of retailers' anticipated regret aversion and experiential regret aversion on the equilibrium decision-makings of a random SCN with multiple production periods. Due to the random demand, the decision-makings of retailers are influenced not only by their anticipated regret, but also by their experiential regret after they have encountered bad or good experiences during past periods. The equilibrium conditions of the model are established. A numerical example is solved to illustrate the benefit of retailers obtained by considering their regret-averse behaviors. Moreover, it is found that retailers should consider their anticipated regret aversion or experiential regret aversion according to different situations of the demand markets.</p>

How do anticipation and experience of regret affect financial decision-making? A lab experiment

Regret is a negative emotion experienced when people realize that a different choice would have led to a better payoff. People can anticipate regret before decisions, which prompts them to make a regret-minimizing decision. Regret affects people’s risk tendencies for financial decisions, though it is less understood how anticipated regret and the experience of regret might affect people’s risk and skewness choices. A lab experiment offers insights into the effect of regret on people’s risk and skewness decisions, with and without feedback. Regret aversion is important for explaining people’s choices when the attributes of lotteries are not too distinct. Moreover, people with greater regret aversion are more likely to choose a positively skewed lottery.

Exploring the impact of COVID-19 on individual's travel mode choice in China.

Travel activities and travel behaviors have been greatly affected by the outbreak of Covid-19. Facing the change of individuals' travel choices, policymakers have to make an appropriate response to mitigate negative consequences. This paper aims to explore how the COVID-19 would impact travel mode choice and the intention of car purchase. The data was collected from a large-scale survey conducted in June 2020 after the highest point. Random utility maximization (RUM), random regret minimization (RRM) and generalized regret minimization (GRRM) are employed to examine the effects of various factors on mode choice behaviors. The estimation results reveal that regret aversion psychology doesn't have a dominant proportion of decision choices, even if the congested condition of the mass mobility plays a significant role in the consideration of decision-making. Combined with the statistical results from the official departments, we concluded that public transport displays a great propensity on the long trip, and meanwhile, the industry of ride-hailing services has shocked sharply. In terms of the intention of traffic tool purchase, carless people prefer to buy electric two-wheel vehicles rather than automobiles. The research findings and the contribution to policy implications give assistance to authority in understanding citizens' travel mode preferences under the impact of COVID-19.

Role of Behavioral Biases in Real Estate Prices in Pakistan

Abstract The study aims to explore the effect of behavioral biases on financial decision making in the real estate sector of Pakistan. The data of a sample of 244 real estate investors are collected through a survey carried out using different sources. The findings of the study show the relationship of different biases, including overconfidence, herding effect, gambler’s fallacy, and regret aversion on prices of real estate. Real estate prices are more affected by overconfidence and gambler’s fallacy than herding effect and regrets aversion bias in Pakistan. The findings furthermore reveal that these biases do not depend on gender, education, and demographics. It is recommended to carefully consider the market factors while making decisions in real estate, as the prices do not always show the real value of the property.

Understanding Investor Behaviour Using Prospect Theory: An Indian Perspective

Kahneman and Tversky's Prospect Theory tries to explain investor behaviour under risk when alternative outcomes are available to them while making an investment decision. Loss Aversion, Regret Aversion, and Mental Accounting are the three dimensions of this theory. Loss aversion is an investor emotion that prevents unloading unprofitable investments because they lead to a loss. Regret Aversion is the anticipation of regret where an investor holds to loss-making investments with the fear of admitting an incorrect investment decision. Mental Accounting is the value investors place on money, often leading to detrimental results. This research attempts to gain deeper insights into the complex investor behaviour which forms an important aspect of behavioural finance. An online survey of 282 pan-India stock market investors is done on the three dimensions and the collected data is analysed using One-way ANOVA to measure the relationship between independent (income, investment amount, education qualification, age, gender, and investor experience) and dependent variables (loss aversion, regret aversion, and mental accounting). This study is of significant interest to financial institutions for product design, to the government in making economic policy, and financial advisors who can consider the independent variables as crucial factors that make their clients prone to behavioural biases.

The Behavior of the Various Personalities of Secondary Equity Investors: Big Five Personality Model

The personality of investors influences their behavior in terms of the behavioral biases exhibited and the returns earned in equity investments. By employing the Big Five personality model, the personality types of a sample of 436 secondary equity investors residing in Chennai, India, are identified, using the questionnaire survey method. The specific behavioral biases—mental accounting, anchoring, gambler’s fallacy, availability, loss aversion, regret aversion, representativeness, and overconfidence—are measured using scenario-based questions. Pearson correlation analysis is performed to identify the biases most likely to be displayed by each investor personality type. The personality dimensions of successful investors are determined using analysis of variance tests. The agreeableness and conscientiousness of investors yield high returns in the secondary equity market. A robust discriminant model is developed, with the investors’ financials and personality dimensions as predictors to discriminate between high and low returns. Wealth managers and financial advisers can apply the findings of the current article to customize trading strategies for their clients (investors) based on investor personality type. Such advisers can diplomatically caution clients to beware of the biases that they are likely to exhibit based on personality type. Financial managers and advisers can also focus more personalized attention on investor personalities that earn lower returns. <b>TOPICS:</b>Wealth management, emerging markets, statistical methods <b>Key Findings</b> ▪ The personality of investors influences their behavior in terms of the behavioral biases exhibited and the returns earned in equity investments. ▪ Investors of each personality type are more likely to exhibit certain behavioral biases. ▪ Agreeable and Conscientious investors yield high returns in the secondary equity market.

The Impact of Behavioral Finance on Lebanese Investors’ Decision Making

The inability of the traditional expected utility maximization of rational investors (within the efficient markets Framework) to explain many empirical patterns; was the main stimulus beyond the appearance for another track to resolve and analyze this inconsistency; through combining behavioral and cognitive psychological theory together where Behavioral Finance is known mainly as the irrational part that deals with investors’ Sentimental side. Furthermore it can be agreed on that behavioral finance is considered as “Subjective judgement” where ideas and decisions cannot be transmitted to other’s knowledge, as each one acts from his own point of interest; unlike conventional finance paradigm. Therefore, this paper seeks to determine the main behavioral errors or biases that are faced mainly by the Lebanese individual investor during decision making process. Results obtained by analyzing 211 questionnaires through SPSS software to develop a Structural equation model. Findings prove that Over Confidence and regret aversion are the main behavioral biases that control the Lebanese individual investors’ decision making.

Risks of Observable and Unobservable Biases in Artificial Intelligence Predicting Consumer Choice

Companies are increasingly adopting Artificial Intelligence (AI) today. Recently however debates started over the risk of human cognitive biases being replicated (and scaled) by AI. Research on biases in AI predicting consumer choice is incipient and focuses on observable biases. We provide a short synthesis of cognitive biases and their potential risk of being replicated in AI-based choice prediction. We also discuss for the first time the risk of unobservable biases, which affect choice indirectly, through other biases. We exemplify this by looking at looking at three prevalent, most frequently investigated biases in consumer behaviour: extremeness aversion, regret aversion and cognitive regulatory focus (prevention- versus promotion-focus). Based on a sample of 1747 respondents, through partial least squares structural equation modelling and significance testing, we show that regret aversion (unobservable bias) significantly reduces extremeness aversion (observable bias) and mediates the influence of cognitive regulatory focus (unobservable bias).

Investigating the psychological factors that affect Egyptian investors’ behaviour and decisions before and after the pandemic

Egyptian investors have lost a large portion of their investment due to the coronavirus pandemic. This research is novel research that aims to identify the behavioral factors of Egyptian investors that affect their investment decisions, before and after the pandemic. A number of survey questionnaires were distributed to Egyptian investors, in addition to personal interviews. Descriptive statistics and a regression model were used to analyzing the impact of psychological factors on the investment decisions for Egyptian investors. Results revealed that demographic and psychological factors influence investment decisions: overconfidence, loss, and regret aversion, disposition effect, representativeness and herding behavior, but it is not affected by gambler’s fallacy. It is affected also by some other demographic variables. However, income level has no effect. After the pandemic, not all demographic and psychological factors affect Egyptian investor’s behaviour. The behaviour finance theory is valid only and applied before the pandemic. This research opens the door for a new dimension to studying how to work on the governance of investors’ decisions, rationalizing those decisions and their effectiveness, which ultimately contributes to achieving high returns on their investment portfolios.

Multiattribute Regret: Theory and Experimental Study

The aim of this paper is two-fold. The first part is to generalize the simple regret model by Bell (1982) and Loomes and Sugden (1982) to cope with the situation in which decision outcomes are multi-attributed. We propose a model which combines the simple regret model for ex ante preferences and the additive difference representation for ex post preferences. Then we show a necessary and sufficient axiomatization of our model under Savage’s framework. The proposed model is composed of three types of functions. One is a value function for each attribute. The others are attribute-dependent and holistic regret-rejoicing functions which respectively capture trade-offs among value-differences of chosen and forgone outcomes for each attribute and among all attributes. We also discuss constructive procedures and their consistency. The second part is to conduct an experiment to measure two attributes case. Participants were asked to join in a work to carry over heavy bags at some varying distances. The data supports the framing effect, that is, participants tend to have convex value functions in each attribute and indicate regret averse for weights and regret seeking for distances in gain frame. On the other hand, participants exhibit concave value functions for both attributes and regret seeking for weights and regret averse (almost regret neutral) for distances in loss frame.

The Financial Behavior of Investment Decision Making Between Real and Financial Assets Sectors

This research was conducted to achieve several objectives and focus research was based on financial behavior theory and prospect theory as grounded theory e.g., investigate the financial decision-making behavior between financial and real assets investment, and confirm the relationship existing between herding behavior and overconfidence factors to the level of loss and regret aversion, and financial literacy into real assets investment decisions. The study used 220 real estate auction respondents as investor samples at the State Assets and Auction Service Office Makassar, South Sulawesi, Indonesia. Data was collected through the use of a questionnaire consisting of 23 questions to measure the variables. Moreover, the research data passed through several feasibility tests like the inner and outer modeling by Partial Least Square - Structural equation model (PLS-SEM) while the hypotheses formulated were also tested to determine the magnitude of the variable relationship. Through the use of the direct and intervening test, loss and regret aversion variables have a positive and significant effect while financial literacy variables have no significant effect. There is a slight difference in the decision-making process for real assets and financial assets investors. Investment decision making behavior in the financial assets sector requires less complicated decisions compared to the decisions related to real assets investments.

Regret theory-based fuzzy multi-objective portfolio selection model involving DEA cross-efficiency and higher moments

This paper deals with fuzzy portfolio selection problems under the framework of bounded rationality, in which the higher moments and DEA cross-efficiency are taken into consideration. To this end, a regret cross-efficiency (RCE) evaluation model is first proposed to evaluate cross-efficiency scores of all assets by integrating several important financial information: return on equity, earnings per share, current ratio, price/earnings ratio, price/book ratio, and beta value. Then, by incorporating cross-efficiency into the mean–variance–skewness framework, a regret theory-based multi-objective portfolio selection model is developed. The model aims to maximize investor’s perceived utility (composed of utility, regret, and rejoice functions) with respect to the four objectives, namely mean–variance–skewness-efficiency, bounded by several realistic constraints. Additionally, considering the inherent uncertainty in data, the criteria related to RCE evaluation as well as asset returns are characterized as fuzzy variables. The current study not only empowers investors with an overall control over the preferences regarding all portfolio objectives, but also gives investors an opportunity to tweak their intrinsic behavioral tendencies from the perspective of regret aversion and rejoice preference, thus achieving the results that are compatible with the actual preferences of investors. A real-world empirical application is presented to demonstrate the effectiveness of the proposed model.

Behavioral Bias in Individual Investment Decisions: Is It a Common Phenomenon in Stock Markets?

This paper aims to investigate the behavioral factors that influence individual investment decision making at a developing country stock market; the Sudanese Stock Exchange Market. The Study employs a cross-sectional survey design as well as analytical methods to collect the necessary data and establish the relationship between the study variables. Data is collected through a structured questionnaire from a sample of 203 individual investors and Correlation and Regression methods are used to conduct the analysis. The findings of the paper provide evidence that behavioral biases play a noticeable role in individual investment decision making process regardless of the degree of development of the stock market. The paper demonstrates that heuristic and market factors play a dominant role in the process of individual decision making in the Khartoum Stock Exchange. The factors that have a significant impact on individual investment decision making process include Representativeness, Overconfidence, Anchoring, Historical cost of stock, Customer preferences, Loss aversion, Mental accounting, Other investors’ trading volume, and Quick reaction to changes in other investors ‘decisions. Factors that have an insignificant impact include Availability bias, Change in stock prices, Regret aversion, and Other investors’ decisions and choices.

PENGARUH OVERCONFIDENCE, HERDING, REGRET AVERSION, DAN RISK TOLERANCE TERHADAP PENGAMBILAN KEPUTUSAN INVESTASI INVESTOR

Investors often make irrational investment decisions. Decisions are often based on their judgment which is far from rational assumptions. When investors face risky situations, there are some objectivity, emotions, risk tolerance and other psychological factors that usually influence their decision making. The theory underlying this research is Efficient Market Hypothesis and Behavioral Finance. Efficient Market Hypothesis explains how information about a security or stock is used to predict the price of a security or stock in the future so that the resulting return can be predicted. Behavioral Finance studies how psychological phenomena influence financial behavior where there are biases that influence a person's behavior such as overconfidence, herding, and regret aversion. This study uses a judgment sampling by collecting data through questionnaires distributed to 100 respondents who have already invested and are in Jakarta with the help of SPSS 20. Measuring instruments in this study are validity, reliability, average, likert scale, test classical assumptions, and multiple linear regression tests with valid, reliable results, the regression model fulfills the assumptions that the residues are normally distributed, there is no heteroscedasticity, and there is no multicollinearity. The results showed that overconfidence had a positive effect on investor investment decision making, while herding, regret aversion, and risk tolerance did not significantly influence investor investment decision making. &#x0D; Key words : Overconfidence, Herding, Regret Aversion, Risk Tolerance, Investment Decision, Efficient Market Hypothesis