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The role of regret in the persistence of anomalies in financial markets (In French)

  • Emmanuel PETIT (GREThA UMR CNRS 5113)

In this article, we provide a unified framework which can take into account numerous behavioural anomalies observed in financial markets (disposition effect, under- and overreaction phenomena and so on). Our general theoretical framework uses both cognitive and perceptual theories of emotion. Defining the emotion as a revision process of beliefs and preferences (Livet (2002)), we explain the role of regret in the occurrence and the persistence of many psychological biases recently identified in financial markets (rationalization, conservatism, hindsight and confirmatory biases, etcetera). Specifically, the tendency to sell superior-performing stocks too early (Shefrin and Statman (1985)) is a direct consequence of the investor incapacity of revising a strong false (however protected) belief which appears to sustain crucially his self-confidence. This cognitive resistance towards the emotional process highlights the importance of the individual and social control of the emotions.

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Paper provided by Groupe de Recherche en Economie Théorique et Appliquée in its series Cahiers du GREThA with number 2010-07.

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Date of creation: 2010
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Handle: RePEc:grt:wpegrt:2010-07
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  1. Harris, Lawrence, 1988. " Predicting Contemporary Volume with Historic Volume at Differential Price Levels: Evidence Supporting the Disposition Effect: Discussion," Journal of Finance, American Finance Association, vol. 43(3), pages 698-99, July.
  2. Gul, Faruk, 1991. "A Theory of Disappointment Aversion," Econometrica, Econometric Society, vol. 59(3), pages 667-86, May.
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  4. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  5. Ferris, Stephen P & Haugen, Robert A & Makhija, Anil K, 1988. " Predicting Contemporary Volume with Historic Volume at Differential Price Levels: Evidence Supporting the Disposition Effect," Journal of Finance, American Finance Association, vol. 43(3), pages 677-97, July.
  6. Mark Grinblatt & Matti Keloharju, 2000. "What Makes Investors Trade?," Yale School of Management Working Papers ysm146, Yale School of Management, revised 01 Nov 2001.
  7. Kent Daniel & Sheridan Titman, 2000. "Market Efficiency in an Irrational World," NBER Working Papers 7489, National Bureau of Economic Research, Inc.
  8. Joel L. Schrag, 1999. "First Impressions Matter: A Model Of Confirmatory Bias," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 37-82, February.
  9. Lucy F. Ackert & Bryan K. Church & Richard Deaves, 2003. "Emotion and financial markets," Economic Review, Federal Reserve Bank of Atlanta, issue Q2, pages 33-41.
  10. Offerman, Theo, 2002. "Hurting hurts more than helping helps," European Economic Review, Elsevier, vol. 46(8), pages 1423-1437, September.
  11. Stracca, Livio, 2004. "Behavioral finance and asset prices: Where do we stand?," Journal of Economic Psychology, Elsevier, vol. 25(3), pages 373-405, June.
  12. Messinis, G., 1998. "Habit Formation and the Theory of Addiction," Department of Economics - Working Papers Series 635, The University of Melbourne.
  13. Hanoch, Yaniv, 2002. ""Neither an angel nor an ant": Emotion as an aid to bounded rationality," Journal of Economic Psychology, Elsevier, vol. 23(1), pages 1-25, February.
  14. Jon Elster, 1998. "Emotions and Economic Theory," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 47-74, March.
  15. David Hirshleifer, 2001. "Investor Psychology and Asset Pricing," Journal of Finance, American Finance Association, vol. 56(4), pages 1533-1597, 08.
  16. David A. Chapman, 1998. "Habit Formation and Aggregate Consumption," Econometrica, Econometric Society, vol. 66(5), pages 1223-1230, September.
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