Regret Theory

The theory states that people expects regret if the results are not in their favor. Fear of regret plays a significant role in decision making. Let’s take an example from the investing world.

Suppose you get a recommendation for stock X from your friend or colleague or analyst. However, you didn’t take it. Next day you found out that the share price of that company soars by 50%, as per the recommendation. You end up cursing yourself for not listening and buying the stock. The next time you came across any recommendation from that person you mostly end up pursuing it blindly, after all the prediction was correct last time.

Let’s take the above example the other way around. Suppose you end up following your friends recommendation and invest a huge capital. However, the price falls sharply, acting 180 degree to the recommendation. You again end up cursing, but this time for following blindly, without doing any study. May be next time you do some home work of your own before following blindly. Though the chances are low as there will be hindsight bias.

The same thing happens in casino generally where you win a first few bets and then you suddenly start pouring in more money out of greed to have quick money. Eventually, you end up losing everything.

Investing is all about risk averse if see how the great players are winning in the game. Charlie and Buffer are both risk averse and the greatest player of the market. They wouldn’t invest on risky bets just to gain more. They would look for least riskiest business they could find. They follow the MiniMax regret approach, a probabilistic model, in which the strategy is to minimize the maximum regret. Look for investment ideas which if turn out the other way around will have least regret.

Bezos had beautifully used the MiniMax approach in his life. While he was working in D. E. Shaw, he had the idea of an online bookstore. He was bit confused whether should he pursue the idea. He simple framed it : In 50 years, will I regret not doing this?

To put in Jeff’s word:

I knew that when I was 80 I was not going to regret having tried this. I was not going to regret trying to participate in this thing called the Internet that I thought was going to be a really big deal. I knew that if I failed I wouldn’t regret that, but I knew the one thing I might regret is not ever having tried.

You can use the same approach next time you find yourself in a regretting situation. Its one of the most effective way to avoid the regrets toward your death bed.