Regret theory is about people's emotional reaction to having made an error of judgment, whether buying a stock that has gone down or not buying one they considered and which has subsequently gone up. Investors may avoid selling stocks that have gone down in order to avoid the regret of having made a bad investment and the embarrassment of reporting the loss. Anchoring is a phenomenon in which, in the absence of better information, investors assume current prices are about right. In a bull market, for example, each new high is 'anchored' by its closeness to the last record, and more distant history increasingly becomes an irrelevance. People tend to give too much weight to recent experience, extrapolating recent trends that are often at odds with long-run averages and probabilities.
People show overconfidence.
They tend to become more optimistic when the market goes up and more pessimistic when the market goes down. Hence, prices fall too much on bad news and rise too much on good news. Two psychological theories underpin these views of investor behavior. The second, 'conservatism', is where people chase what they see as a trend but remain slow to change their opinions in the face of new evidence that runs counter to their current view of the world. The ideas of behavioral finance apply as much to financial analysts as they do to individual investors.