Order of Transactions Influences Investors’ Repurchasing Decisions

Individual investors’ tendency to repurchase a previously owned stock is influenced significantly by the last stock they sold. Repurchases are most likely to occur if the stock being purchased was the last one sold and was sold at a profit.

This behavior is cited as an example of the recency bias. The recency bias refers to the influence that recent events have on decision-making. A recently sold stock is more likely to be recalled than one previously sold. Though the order in which previous stocks were sold should not influence the next purchase decision, there is evidence that it does.

The propensity to repurchase a previously owned stock declines by an “economically significant 23%” when a different stock has been sold most recently. Notably, it does not matter if the most recent trade resulted in a profit or loss. Recently realizing a profit on one stock only increases the odds of repurchasing a previously sold stock by a mere 1%. “Recency has a dominant impact on the decision to repurchase a stock and far outweighs the relatively small impact of prior profitability. In other words, the learning from recent experiences and forgetting of older experiences seems to occur simultaneously,” observed the study’s authors.

Repurchases were influenced by whether a profit was recently realized in the same stock. The realization of gains increased the odds of a repurchase, while a loss led households to refrain from doing so. (A similar pattern was found to exist among mutual fund managers, as discussed in the Briefly Noted section of the October 2018 AAII Journal, “Mutual Funds Show Bias Toward Previous Winners.”)

The findings are based on analysis of data from a large discount brokerage firm for the period of January 1991 through November 1996. The data included approximately 1.9 million trades made by nearly 78,000 households.

About 41% of the households made at least one repurchase. Those who engaged in repurchasing activities tended to be most active. Repurchases accounted for nearly 80% of all purchase trades and nearly 90% of the dollar value of all purchase trades. Repurchases accounted for 17% of the total purchase trades made by repurchasing households. Despite this high activity, net (post-commission) returns tended to be either insignificant or negative.

Source: “Availability, Recency, and Sophistication in the Repurchasing Behavior of Retail Investors,” by John R. Nofsinger and Abhishek Varma; Journal of Banking & Finance, April 2013.