Once Burned, Twice Shy: How Pride and Regret Affect the Repurchase of Stocks Previously Sold

We establish two previously undocumented patterns in the purchase selections of individual investors and confirm a related pattern. These patterns hinge on investors’ previous experience with a stock. We demonstrate that investors prefer to: (1) repurchase stocks they previously sold for a gain rather than stocks they previously sold for a loss, (2) repurchase stocks that have lost value subsequent to a prior sale, rather than stocks that have gained value subsequent to a prior sale, and (3) purchase additional shares of stocks that have lost value since being purchased, rather than additional shares of stocks that have gained value since being purchased. We document these trading patterns by analyzing trading records for 66,465 households at a large discount broker between January 1991 and November 1996, and 665,533 investors at a large retail broker between January 1997 and June 1999. We propose that these trading patterns are driven by investors’ desire to limit the degree of regret they experience in association with unsuccessful trades and increase feelings of pride and satisfaction associated with successful trades. Investor returns do not reliably benefit from any of the three trading patterns we document.