Definition
Regret Aversion
Regret aversion is the tendency to make choices that minimise the chance of feeling regret later, even when those choices are not financially optimal.
Fear of regret can cause both inaction and action: an investor may avoid selling a loser to dodge the regret of crystallising a mistake, or refuse to invest at all for fear of buying just before a fall. It also drives herding — following the crowd feels less regrettable than being wrong alone.
Regret aversion often leads to overly conservative portfolios, missed opportunities and an inability to cut losses. Pre-committing to a rules-based plan (set allocations, automatic rebalancing) reduces the emotional weight of each decision, since you are following a process rather than making a regret-laden judgement each time.
Related terms
- Loss AversionLoss aversion is the well-documented tendency for the pain of a loss to feel roughly twice as powerful as the pleasure of an equivalent gain.
- Herd MentalityHerd mentality is the tendency to copy the financial decisions of a crowd — buying what everyone is buying and selling when everyone panics — instead of relying on independent analysis.
- Status Quo BiasStatus quo bias is the preference for keeping things as they are, leading people to stick with default options and avoid changes even when better alternatives exist.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.