Investors always face regret - It needs to be controlled

 

There is not enough discussion on the impact of regret with investment decision-making. Regret is focused of many parts of life, and it haunts many through their lives. A regret survey program suggests that there are regrets that linger for decades for some people. So why wouldn't regret play a meaningful impact on our trading decisions.? It does but we often don't discuss it. We often don't us the phrase, "I regret that trade...". Of course, many behavioral biases are tied to regret. 

Regret aversion suggests that investors are not willing to decide because of the fear that the decision may turn out to be wrong and then you will have to face the consequences of your actions. Regret can be a powerful and discomforting state. 

Regret aversion is the action we take to not have face uncertainty. Uncertainty causes us to delay decisions because we fear our actions will then lead to regret. It is not just the result being wrong but that we are responsible for that wrong result. 

The prospect theory of Kahneman and Tversky is a method of measuring regret given there is more pain from downside than gain from upside. The disposition effect of prematurely selling asset that have gains is a result of regret. Classic utility theory does not match the human behavior that suffers from regret. 

A good simple book on regret frames the broad problem that everyone faces, see The Power of Regret: How looking backwards makes us move forward by Daniel Pink. This is not an investment book and will not give you secrets for making more money; however, it will provide some food for thought on the regret problem that is different from the cold testing of behavior biases. It does try and offer some methods for dealing with the pain from regret.

Regret will focus on counterfactuals and is tied to emotions. There is the "if only" and "at least" counterfactuals. The "at least" focuses on the fact that some situations could have been worse. The "if only" counterfactual haunts us with the damaging, if only I did more. Thinking about "if only" situations is personal and what we most want to avoid. 

Regret creates emotions. If these emotions are ignored, we are delusional. If regret feelings are fed, it can turn to despair. If the feelings are focused on why the regret occurred, it can turn into something positive. Regret is something natural and must be controlled and channeled to reach better future decisions.