The Academy of Financial Services 35th Annual Meeting

purchases, representativeness; reference points, performance

Research in behavioural finance has uncovered that investors engage emotionally when trading. We investigate how three psychological factors influence purchase and repurchase decisions: representativeness, the influence of prior gains, and reference points. Using trading data of 7 200 UK investors we find that purchase decisions are influenced by representative heuristic and repurchase decisions are influenced by both representative heuristic and prior profitability. Further survival analysis showed that investors use the prior selling price as a unique reference point. Investors are more likely to repurchase a stock when trading above its reference point, but more likely to initiate the repurchase when trading below. Investors are influenced by previous experience and engage learning behaviour when they seek to reinforce past success. As reference points are inferred but infrequently researched, this research adds to the literature and provides important and robust results for those engaging with financial planning clients.