Regret Theory | And how to Overcome it

Let's dive a bit deeper into this common trait of investors!

Hey!  Thanks for stopping in to look a bit deeper into “Regret Theory”

I thought this image below summed it up nicely ;)

As an experienced trader, I've seen a broad range of emotions that influence our investment decisions. 

Regret Theory suggests that we anticipate regret if we make a wrong choice, and this anticipation impacts our decisions. In essence, it's about the fear of making incorrect decisions and the subsequent emotional discomfort that follows.  Back when I started futures trading, I remember so many days where I couldn’t pull the trigger because I had so many losing trades that I just didn’t want to trade anymore out of fear of the “losing” feeling.

Others have dealt with similar feelings throughout all of market history.  Take this scenario, for instance. An investor decides to sell a stock that's been underperforming. The very next day, that stock's value skyrockets. That investor is likely to experience an intense wave of regret for selling too soon. This feeling, this fear of regret, can heavily influence their future investing decisions.  Sound familiar?

On the other hand, Regret Theory also manifests itself when an investor holds onto a declining stock for fear that it might rebound after they sell it. The potential regret of selling too soon can paralyze us into inaction, even when the rational choice might be to cut our losses.  Maybe this one hits home more ;)

We see that Regret Theory can lead us to be overly cautious, resulting in missed opportunities, or overly optimistic, resulting in holding onto failing investments. Either way, it's our bottom line that suffers.  Frankly put, successful traders and investors evade this pitfall.  And self awareness is the first step in admitting you have a problem!  You can then recognize the feelings quicker than before and therefore save yourself money more often.

How can you overcome this? Here are a few strategies:

1. Have a well-defined investment strategy and stick to it: When you're following a clear strategy, you're less likely to be swayed by emotions. You're investing with intent and purpose, not on a whim.  This is key and has helped me drastically.  If I had a plan for something, I can always look back and be okay with the result.  No plan?  I am not okay with that.

2. Accept that losses are part of the process: Every investor, even the most successful ones, has experienced losses. It's a part of the journey. Don't let the fear of possible regret lead you to irrational decisions.

3. Learn from past decisions, but don't dwell on them. Reflection is essential, but ruminating about past decisions can lead to a cycle of regret. Learn your lessons and move on.  This is key, developing a snowball of negativity can let results suffer longer than necessary.

4. Regularly review and adjust your strategy based on performance, not emotions: By periodically reviewing your strategy and its outcomes, you'll be able to adjust based on tangible results, rather than emotional reactions.

5. Consider advice from financial advisors or using robo-advisors: Professional advice or algorithm-driven platforms can provide unbiased guidance, helping to limit emotion-driven decisions.

The key to overcoming Regret Theory is not about avoiding mistakes altogether, but learning to manage our emotions to make more rational decisions. It's a journey, and with these strategies, I hope you'll find it a bit smoother.  As always, the goal is to make less and less mistakes and to keep your seat at the table!

Happy investing!