Reference Points and Regret Aversion in Industry: The Predictive Power of Market Capitalization-Based Regret Variables

Overview

This research investigates the explanatory capacity of investor regret for cross-sectional asset return variation within behavioral finance frameworks. The study extends conventional regret theory, which relies principally on historical returns, by incorporating multiple salient reference points derived from market capitalization, trading volume, and trading value. The research hypothesizes that highly visible market features function as psychological anchors alongside past performance metrics, thereby providing more comprehensive characterization of regret-driven investor behavior.

Methods and approach

The analysis employs Fama-MacBeth cross-sectional regressions on Korean equity markets spanning KOSPI and KOSDAQ listings from 1986 through 2024. Four regret variables are constructed: SIZEREG (market capitalization-based), VOREG (trading volume-based), VOPREG (trading value-based), and RETREG (conventional return-based). Multivariate regression specifications control for established firm characteristics. Portfolio double-sorting techniques stratify observations by market capitalization, volatility, and price levels to examine differential predictive effects. Robustness examinations test alternative variable specifications and performance across distinct industry conditions.

Key Findings

All four regret measures demonstrate statistically significant predictive capacity for subsequent returns. SIZEREG exhibits the strongest explanatory power, implying that market capitalization functions as a primary psychological reference point. Multivariate specifications confirm SIZEREG robustness relative to RETREG across model configurations. The predictive strength of SIZEREG intensifies substantially within subsamples characterized by small capitalization, elevated volatility, and low absolute price levels. Ancillary robustness tests validate result stability across alternative measurement approaches and industry-specific conditions, establishing consistency in the empirical findings.

Implications

The findings indicate that investor regret operates through attention-driven mechanisms extending beyond historical return comparisons. Market capitalization, as a highly salient and observable attribute, serves as a materially important psychological reference point in investor decision-making. This suggests that standard return-based regret theories provide incomplete characterization of actual investor psychology in equity markets, necessitating integration of market visibility and attention dynamics.

Scope and limitations

This summary is based on the study abstract and available metadata. It does not include a full analysis of the complete paper, supplementary materials, or underlying datasets unless explicitly stated. Findings should be interpreted in the context of the original publication.