Emotion, Investor Behavior, and Market Turbulence: an Analyais Based on Regret Theory

2015 Fiscal Year Final Research Report

• Project/Area Number: 25590069
• Research Category: Grant-in-Aid for Challenging Exploratory Research
• Allocation Type: Multi-year Fund
• Research Field: Money/ Finance
• Research Institution: Ritsumeikan University
• Principal Investigator: QIN Jie 立命館大学, 経済学部, 教授 (40329751)
• Project Period (FY): 2013-04-01 – 2016-03-31
• Keywords: 後悔 / Regret of inaction / 後悔理論 / バブル / 金融危機 / Herd / 感情 / 神経経済学

Outline of Final Research Achievements

The financial crisis of 2007-2008 demonstrated the importance to include emotion in finance theory. This research focuses on regret. Regret has important effects on investment. For example, if stock prices keep rising, investors who regret the missed opportunity of buying stocks at lower prices may try to correct their mistakes by trading aggressively. This will lead to higher prices and triger a bubble. Even Harry Markowitz, a winner of Nobel Prize in economics, said that he split his pension contributions 50/50 between bonds and equities to minimize future regret. This research constructs a theoretical model of regret and investment. A distinctive feature of this model is that it not only includes “regret over action”, the regret of a bad investment, but also incorporates “regret over inaction”, the regret of a missed opportunity. This model illustrates how regret can affect investor behavior. It also provides theoretical explanations to bubbles, crashes, and other phenomena.

Free Research Field

金融・ファイナンス