How does regret affect investor behaviour? Evidence from Chinese stock markets

Abstract Using a unique dataset from Chinese stock markets, we quantify the actual effect regret has upon investors’ stock trading behaviour. We find that experienced regret over the type of order placed last time affects the type of order an investor subsequently places. The effect is stronger following an action rather than inaction, loss on the prior order, and an unusual order strategy for the investor. Regret-based decisions appear to be suboptimal since they experience poor performance. These results are consistent with the predictions of regret theory, but not that of rational learning as an explanation.