Regret Aversion: How the Fear of Being Wrong Leads to Bad Decisions
The fear of future regret can make investors hold losers too long, avoid decisions, or follow the crowd so they are not "wrong alone." Understanding regret aversion and keeping it from running your portfolio.
Many bad investment decisions don't come from a lack of knowledge, but from the fear of regretting it later. We hesitate to sell a loser in case it rebounds right after we sell; we hesitate to buy in case it drops right after we do. This fear of regret has a name: regret aversion.
What regret aversion is
It's the tendency to make decisions aimed at avoiding future regret, rather than at the best outcome. The pain of regretting something you did is usually felt more strongly than the regret over something you didn't do β so we tend to avoid action, even when action is the right choice.
How it shows up in investing
- Holding losers too long. Selling turns a "paper" loss into a "real" one and locks in the chance to regret it if the price recovers. So we cling to a weak asset to avoid facing the decision.
- Paralysis, afraid to act. No buying, no selling, no rebalancing β because every action carries the risk of regret.
- Following the crowd. Being wrong alongside the majority feels less painful than being wrong alone. So we buy what everyone buys, to be "wrong together" if it fails.
- Taking profits too early. Selling quickly to "lock it in" and avoid regret if the gain evaporates β even though that cuts winners short.
Why it's costly
Regret aversion makes decisions revolve around future emotion instead of probability and value. It prolongs mistakes (holding weak assets), stifles correct decisions (rebalancing, cutting losses by plan), and pushes us into herd behavior β which typically buys high and sells low. The paradox: in trying to avoid regret, we create more regrettable outcomes.
How to keep it in check
- Decide by pre-set rules. When buy/sell criteria are defined in advance and applied mechanically, each action is "following the process," not an emotional bet to regret later.
- Look at opportunity cost. Holding a weak asset isn't "free" β that capital could be working elsewhere. Inaction is also a choice with a price.
- Judge decisions by process, not a single outcome. A probabilistically sound decision can still turn out badly due to luck; that doesn't make it a wrong decision.
- Automate the repetitive parts. Recurring contributions and scheduled rebalancing remove most of the openings for the fear of regret to intervene.
- Accept that regret can't be fully avoided. There will always be "if only" moments. The goal is to make good decisions consistently, not to dodge every feeling of regret.
The fear of regret is a natural emotion, but it's a poor investment advisor. When you shift decision-making from emotion to a rule-based system, regret aversion loses much of its power to run your portfolio.