Regret Aversion
Why do we avoid making decisions because of how we might feel if they turn out badly?
A position is reviewed and the case for change is clear, but the decision is delayed. Not because there is new information, but because of what might happen next. Selling now could be followed by a recovery. Buying now could be followed by a decline. The possibility of making a decision that is immediately proven wrong begins to carry weight.
This is where regret aversion begins to influence behaviour. It is not simply about avoiding losses. It is about avoiding the emotional impact of recognising that a different choice would have led to a better outcome. The decision is shaped not only by what is likely to happen, but by how the outcome might feel in hindsight.
This tendency has been studied in behavioural economics, including work by Graham Loomes and Robert Sugden, who explored how anticipated regret influences decision-making. Their research showed that individuals often make choices that minimise the potential for future regret, even if those choices are not optimal from a purely outcome-based perspective.
In markets, regret aversion can lead to hesitation at key moments. Investors may avoid selling a declining position because doing so would confirm that the original decision was wrong. They may also avoid entering a new position for fear that it will move against them immediately. In both cases, the focus shifts from evaluating the opportunity to managing the emotional consequences of being wrong.
What makes this difficult to recognise is how reasonable it feels. Avoiding regret can appear cautious, even prudent. The decision not to act can be framed as patience or discipline. But over time, it can lead to missed opportunities and delayed responses, particularly when action is required.
You may notice this in yourself when you hesitate to act despite having a clear view, or when the possibility of being wrong feels more significant than the opportunity itself. There can also be a tendency to prefer inaction, as it carries less immediate responsibility than a decision that can be judged in hindsight.
Regret aversion does not change the outcome.
But it can change the decisions that lead to it.