Regret Aversion & Decision Paralysis
Understanding Regret
Regret: Painful emotional experience when realizing a different decision would have produced better outcome.
Anticipated Regret: Expected future regret influences current decisions.
Types of Regret
Regret of Commission ("I shouldn't have done that"):
- Selling stock that then doubles
- Buying stock that crashes
- Active decision that fails
Regret of Omission ("I should have done that"):
- Didn't buy stock that doubled
- Didn't sell before crash
- Inaction that missed opportunity
Psychological Asymmetry: Regret of commission hurts MORE than regret of omission, even with identical outcomes.
Regret in Investment Decisions
Paralysis & Inaction
Fear of Wrong Choice → Do nothing.
Examples:
- Won't buy (might fall)
- Won't sell (might rise)
- Result: Freeze, miss opportunities
Evidence: Investors who experience large losses often stop trading entirely for months (regret paralysis).
Disposition Effect
Mechanism: Selling winners (avoid potential regret of losing gains) while holding losers (avoid regret of realizing loss).
Result: Lock in small gains, let losses run—opposite of optimal.
Regret Logic:
- Sell winner: "I won't regret taking profit"
- Hold loser: "If I sell and it recovers, I'll regret it
"
Herding by Regret
Social Regret: Losing alone HURTS MORE than losing with crowd.
Logic: "If everyone bought and lost, it's okay. If I alone bought and lost, I'm stupid."
Result: Follow crowd to minimize potential social regret, even when private info suggests otherwise.
Example: During bubbles, many investors know prices irrational but buy anyway ("Everyone's doing it, if I miss out I'll regret it").
Excessive Diversification
Fear: Regretting wrong stock choice.
Reaction: "Buy everything"—over-diversification to minimal distinct positions.
Result: Returns diluted, become index-hugger without index fund's low cost.
Key Takeaways
- Regret aversion: Fear of future regret powerfully influences decisions
- Commission hurts more: Active mistakes feel worse than passive misses
- Paralysis: Fear of regret causes inaction, missed opportunities
- Disposition effect: Sell winners (avoid losing gains), hold losers (avoid admitting mistake)
- Herding: Losing with crowd less regrettable than losing alone
- Mitigation: Pre-commitment rules, process focus, self-compassion, probabilistic thinking
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