Regret Theory
Candlefocus EditorInvestors who fear the regret of making a mistake often hesitate in making bold moves that would help improve their portfolio performance. Regret theory explains why investors often stay in their comfort zones by avoiding making decisions that could generate the greatest returns. They often focus on short-term profits while assuming the ‘path-of-least-resistance’ approach is the best way to earn returns.
To successfully mitigate the influence of regret theory on an investor’s portfolio, one must recognize the bias that it generates and make conscious decisions against it. Having a clear investment strategy and goals can help take action towards reaching those goals. Automating investments can also prevent human emotions from clouding decision-making, as automation helps eliminate the chances of regretting decisions.
Regret theory is an important part of investing psychology, as those who adhere to it can easily fall into poor investment practices by either over-risking or avoiding risk. The theory offers insight into why investors are prone to paralysis or irrational decision-making, which ultimately results in less than desirable investment outcomes. By understanding the potential for regret and combatting it with smart investment strategies and decisions, one can become a better investor.