Regret avoidance is one of those biases in behavioral finance that doesn’t need much of an introduction. There’s no need to define regret or define avoidance, the meaning is obvious in the name. But, while it’s simple to understand, the examples of regret avoidance should be taken seriously. Read further to see why it all makes sense, yet makes no sense at all, all at the same time.

1. Regret avoidance
2. Should have, could have, would have
3. Safety in numbers
4. Last chance, anyone?
5. Examples of regret avoidance are plentiful

If you’ve ever regretted doing something, you’re human. If you haven’t, this is perhaps not the right blog for you. But if you’re reasonably normal, you’ll know that the feeling of regret is unpleasant and one that we’d rather avoid at all costs.

Imagine you buy a lottery ticket every week and always pick the identical sequence of numbers. One week, you decide to try some different numbers. To your dismay, your standard sequence of numbers wins the lottery; the one week you didn’t pick those numbers! Disappointment is an understatement of what you might feel at that moment. Even though both sets of numbers had an equal probability of winning, you’d feel the regret of not going with the other. Thus, avoiding regret and regret theory influences the decisions we make, and we pick the same numbers every week.

Regret is the feeling of having made the wrong decision. We can apply this to many facets of our lives. Doesn’t matter how we slice it, it’s not a nice feeling. Especially when we start talking about finance and money.

Consider how regret avoidance works in an investing scenario: two investors and Amazon shares. Investor A considered buying Amazon shares 10 years ago (when the share price was around $140), but didn’t. Investor B was already holding Amazon shares 10 years ago, but sold them in that year. Ten years later and we know how the story ends. Amazon’s share price is at $3500, equating to a compound annual return of 38%. Which investor do you think is likely to feel more regret?

Considered objectively, the two situations are identical. Both Investor A and Investor B were unlucky and made the wrong choice and are out of pocket by the same amount. The only difference is that Investor B already held the shares in Amazon. Despite the similarities, Investor B is likely to be experiencing more regret as he/she made an active decision to sell. Investor A made a passive decision not to buy and thus personifies the majority of people who didn’t buy the shares. Whereas Investor B represents the exception. Thus, whoever does not follow the crowd experiences more regret.

Hopefully you’re starting to see how our behavioral biases are all interconnected? We avoid regret by conforming to social norms or the status quo. That’s why default options work. That’s why herding behaviour takes over. That’s where loss aversion thrives. I can keep on going… But while some might say there is safety in numbers, it can just as easily work against you.

A final thing to consider with regret avoidance is that our fear of regret is magnified when we hear about ‘one time only’ or ‘last chance’ offers. If you never cared for a shelf divider before, why would you want to buy one now? It’s illogical.

In short, we do everything we can to avoid any regrettable decisions. This then leads us to letting our past decisions influence our present decisions. And that’s when a whole bunch of other biases start creeping in.

• Heuristics and biases in decision making – This was the first post in the series which shares some behavioural economics research. Specifically, the heuristics and biases that influence our relationship with money. It uses System 1 and System 2 thinking examples from Daniel Kahneman’s New York Times best selling book, Thinking Fast and Slow, to help us be more conscious of the workings of our brain. 

• Mirror, mirror, on the wall, stop telling me I’m wonderful – This post focuses on the impact of overconfidence bias in decision making. It introduces the illusion of knowledge bias and the illusion of control bias to illustrate the difference between confidence and carelessness. It also discusses the better than average effect, the self-serving bias and fundamental attribution error. You’ll learn how to confront some unpalatable truths and get out of any false sense of comfort (if you’re up for the challenge?).

• Why you can’t argue with a vegan – Ballsy title, we know. But if you read the post you’ll (hopefully) understand why. We’ll be discussing confirmation bias. It’s one of those psychological biases that you can see everywhere. We’ll also touch on cognitive dissonance theory. We all struggle with these biases. They’re both humorous and serious. But because of that, it’s useful to know how to avoid confirmation bias when you need to.

• Size does matter… when it comes to framing – This post uses framing effect examples to show how framing bias influences the way we interpret information and make decisions. We discuss glossing, the compromise effect, and how the size of the frame can influence the volatility of your investment portfolio.

• Loss aversion vs risk aversion – Once you understand framing, you’re ready for this post. It introduces an incredibly powerful bias known as loss aversion. It also touches on prospect theory, the disposition effect and impression management.

• Anchors pulling you down? – Anchoring bias is a straightforward behavioural bias that causes us to focus on a certain initial value and then make decisions with reference to it. This post looks at some examples of this anchoring effect.

• The danger of the default – Default options nudge us to make better decisions. The option of opting out also respects freedom of choice. This post unpacks this notion of libertarian paternalism and the perils of status quo bias.

• When the past influences the future – The Concorde effect is a famous example of sunk cost investment. Too often we invest time, money and energy into something we should’ve just abandoned. This post looks at some examples of how sunk cost fallacy affects our human decision processes.

• What’s mine is more valuable – In this post, you’ll learn why you place extra value on things you own. The endowment effect has implications for our investment portfolio, bonuses and consumer behaviour.

• How to improve self-control – Self-control is an essential life skill. It’s what separates humans from the rest of the animal kingdom. Learn how to improve self-control to achieve your long-term goals.

• Procrastination is the enemy of success – We know procrastination is the enemy of success. But while it looks like laziness, it’s often just mental exhaustion at play. Learn how to overcome procrastination.

• The problem with wanting it now – When you delay instant gratification, you will experience long-term satisfaction. It’s the hyperbolic vs exponential discounting debate. Don’t let present bias win!

• The power of first impressions – The order of information influences your decisions. First impressions matter! It’s all got to do with primacy and recency effects.

• We prefer wrong information to no information – Availability bias and survivorship bias influence our decision-making. We make decisions based on the information available to us.

• Learn to deal with uncertainty – Risk and uncertainty will always surround us. Gambler’s Fallacy, the hot-hand effect, the law of small numbers & ambiguity aversion are just some of the biases that arise because of it.

• Stop stereotyping – Representativeness heuristic refers to the fact that we stereotype. It’s a mental shortcut. But beware of making unfounded comparisons.

• Mental Accounting – Money is money! Or is it? Mental accounting says we place different values on different money which leads to irrational decision making.

• Money Illusion– Money illusion is a sneaky bias. It causes us to focus on the amount of money in our hands, rather than it’s purchasing power.

• Home bias – We invest close to home and in what we know. But this lack of diversification results in missed opportunities. Say hello to ‘home bias’.