Regret Avoidance

Humans dislike regret, the feeling of having made a choice that turned out badly. Behavioural finance, the study of how psychology affects money decisions, shows that this dislike can steer people away from sound choices.

They protect themselves from future regret instead of aiming for the best outcome. A classic example is holding on to a falling investment.

Selling would turn a paper loss into a real one, and with it the admission that the original decision was wrong. So the investor waits, hoping for a recovery that would make the regret disappear, even if the money could be better used elsewhere.

The bias works in the opposite direction too. An investor who sold a winner early and watched it keep climbing may become reluctant to sell anything, or may chase the next hot opportunity out of fear of missing out.

Following the crowd offers a similar comfort, because a loss shared with many others feels less personal. Regret avoidance also leads to inaction.

A manager facing a difficult capital budgeting decision may delay it or choose the conventional option, reasoning that failure with the standard choice is easier to defend than failure with a bold one. The cost of not deciding is real, but it rarely shows up as a line in the accounts.

There are ways to reduce its influence. Setting rules in advance, such as selling any position that falls by a set percentage or reviewing investments against their original reasons, takes the emotion out of the moment.

Written decision logs help too, since they show what was known at the time and make it easier to judge a decision by its quality instead of its result. For businesses, the practical point is to look for regret in the way decisions are framed.

Projects kept alive because stopping would mean admitting a mistake are a common symptom, and so is the phrase we have already spent too much to stop now. A culture that treats a well-reasoned decision with a bad outcome as acceptable makes better decisions over time.