Investors are far from rational: They are often guided by emotions such as regret, disappointment, pride and contentment rather than an objective assessment of the facts.

Professor Brad Barber, a leading expert on investor psychology, joined with Terrance Odean of UC Berkeley’s Haas School of Business and Michal Strahilevitz of the Ageno School of Business at Golden Gate University to investigate how individual traders’ market experiences affect their purchasing behavior.

In “Once Burned Twice Shy: How Naïve Learning, Counterfactuals and Regret Affect the Repurchase of Stocks Previously Sold,” published in the Journal of Marketing Research, Barber and his colleagues analyzed trading records for 66,465 U.S. households with accounts at a large discount broker between 1991–1996 and another 596,314 U.S. investors with accounts at a large retail broker between 1997–1999.

They looked at each day an investor made a stock purchase and whether the investor had sold that same stock for a gain or loss during the previous 252 trading days. They learned that investors are less likely to repurchase both stocks that were previously sold for a loss, and those that have gone up in price since they were last sold. Investors are more likely to repurchase a stock if they previously sold it for a gain and have the opportunity to repurchase it at a lower price.

“Having sold a stock, investors are disappointed if it continues to rise and regret having sold it,” said Barber. “They anticipate that their disappointment and regret will be more intense if they repurchase such a stock rather than not.”