Experience of Regret and Subsequent Trading Behavior

Regret is a proposed explanation for many puzzles in economics and finance. Yet very few studies analyze the effect of experienced regret on subsequent decisions in a real-world-setting. We find that after experiencing regret, individuals are more likely to change their decision to place a market or limit order. Confirming the predictions of regret theory, the effect of regret is stronger following an action rather than inaction, loss on the prior order, and an unusual order strategy for the individual. Moreover, decisions influenced by regret yield poor returns. The totality of these results rules out rational learning as an explanation.