REGRET AVERSION AND FOMO CYCLES: EMPIRICAL ANALYSIS OF ENTRY TIMING ANOMALIES IN RETAIL TREND TRADING

Abstract

In the microstructure of financial markets, retail investors have long faced a dual dilemma of the disposition effect and timing inefficiency, resulting in the continuous erosion of their wealth during trading. Although traditional finance, based on the Efficient Market Hypothesis (EMH), assumes investors are rational utility maximizers, numerous studies in behavioral finance have revealed the dominant role of psychological biases in investment decisions. This paper focuses on the two most fatal aspects of trend-following strategy—early-stage hesitation (inaction leading to a missed opportunity) and late-stage chasing at high prices—and, by combining Regret Theory and the concept of Fear of Missing Out (FOMO), constructs a psychodynamic model to explain entry timing anomalies among retail investors.Using detailed micro survey data from 773 active traders in the Chinese futures market, our empirical results show: (1) FOMO is highly pervasive among retail investors: 96.99% of respondents admitted to experiencing the complete “observe–hesitate–missed-out–chase-high” FOMO cycle, indicating that this behavioral bias is not a sporadic individual phenomenon but a systematic market-wide one; (2) Regret aversion exhibits time asymmetry: in the early phase of a trend, investors display “inaction inertia” to avoid regret from Errors of Commission; whereas at the late phase of a trend, social comparison pressure and counterfactual thinking trigger intense FOMO emotions, leading investors to panic-buy to avoid the regret of missed opportunities (Errors of Omission); (3) The failure of stop-loss behavior (accounting for 42.7% of attributed causes) is the extension of regret aversion into the exit phase, as investors postpone the psychological pain of admitting mistakes by refusing to cut losses.Further findings indicate that although 90.7% of investors express a strong desire to learn technical analysis, it is the lack of disciplined trading plans (62%) that is the fundamental cause of the FOMO cycle. Our study suggests that retail investors’ losses are essentially the monetization of failures in managing “regret emotions.” The conclusion section proposes constructing rules-based trading systems to mitigate these psychological biases.