Regret Aversion

Regret aversion is the psychology of avoiding or delaying a decision out of worry over regret you might feel in the future. It was laid out in 'regret theory,' published separately in 1982 by the economist Bell and by Loomes & Sugden.

The core of this theory is that when people choose, they don't just calculate expected return — they also factor in the emotion of 'how much will I regret this if it turns out wrong.' So they sometimes make the choice they expect to regret less, rather than the choice that loses less in the end.

There are two kinds of regret: the regret of commission ('I did it and it was wrong') and the regret of omission ('I didn't do it and it turned out to be an opportunity').

For example, if you buy an asset and take a loss, you regret it strongly: 'I shouldn't have bought.' Conversely, if you didn't buy and it rose sharply, you lament 'I should have.' Many people tend to feel the regret of 'an action I took myself' going wrong more painfully, so they easily lean toward doing nothing at all.

Severe regret aversion leads to two traps. First, you keep delaying the buys and sells you planned and miss the timing. 'Let's just watch a little longer' repeats itself.

Second, you want to offload the decision onto others and follow the crowd. It's the psychology of 'if everyone's buying and I buy too, then even if it's wrong, I'm not the only one wrong.' Being wrong together feels less painful than deciding alone and regretting alone. But this can lead to buying high and selling low, exactly like everyone else.

Deciding by 'rules' instead of emotion is the most effective. For example, regular fixed-amount investing on the same day each month greatly reduces the room for regret, since you don't have to agonize over whether to buy every single time.

Another is to write down the reason for your decision in advance. If you record 'why you decided to buy at this time,' you can later look back at the judgment process itself instead of regretting based only on the outcome.