(1) Regret minimization & loss aversion: If a person- holds on to a losing stock-for too long-isn it loss aversion. Schweser sometimes calls its loss aversion & sometimes-regret minimization. is there any way to distinguish these two . (2) Noise trader risk: In Page 191- of Book1- Reading 13- Schweser- there is persistent mispricing-since arbitrageurs-cant eliminate systematic risk. But if long & short positions can be entered into-wont systematic risk be eliminated- so is a constraint on short sales-always assumed to be there.
regret minimuziation i see as staying comfortable in your inverstments and not selling (for fear of losing money) and also relying on income (dividends and interest) instead of selling… I see loss aversionas you mentioned above…
My heuristic is… When investor already owns the asset (its moved up or down), I call it regret minimisation. When the investor is just scared of putting his chips in the game, I use loss aversion.
Etienne Wrote: ------------------------------------------------------- > My heuristic is… > > When investor already owns the asset (its moved up > or down), I call it regret minimisation. When the > investor is just scared of putting his chips in > the game, I use loss aversion. That is just wrong. When you are over conservative it is because you dont want to experience regret - regret minimization
Loss aversion may also lead to risky behaviour such as cost-averaging. Regret minimization would mean not taking a decision so as to avoid regret, or taking a less-than-optimal decision to avoid regret. For example, you hold 50% bonds and 50% stocks even when you know stocks outperform bonds over the long run.