1 To Trade, Or Not To Trade: A Model of Regret and Investment

Abstract: This paper examines the effect of regret on investment in a market where investors can choose to trade, or not to trade, an asset with uncertain value. Investors face the tradeoff between the expect utility of investment return and the expected disutility of regret. When the movement of price is moderate, investors take positions according to their private information. When price becomes more volatile, some investors will ignore their private information and exit the market. In case the price is extremely high or extremely low, regret has such a strong effect that a market-wide cascade will come into occurrence