As we continue our series on “Behavioral Biases”, we sought the expertise once again of the academic staff at www.Investopedia.com to discuss “Regret Bias”. Before we highlight their comments, we felt it helpful to provide an overview of how the broad emotion of regret can actually lead to major health problems.
According to Good Therapy at https://www.goodtherapy.org/blog/psychpedia/regret; “… regret is more commonly associated with the negative effects it can have on a person’s happiness. Regret may lead to:
· A bias in one’s decision-making, resulting in poor choices being made
· Anxiety caused by repeatedly thinking about the perceived better choice
· Chronic feelings of sadness and dysphoria
· Varying degrees of Guilt
Regret can significantly impede happiness because regret often causes people to feel shame, sadness, or remorse about decisions or the ways in which they have spent their lives. Sometimes regret can contribute to depression, but depression can also cause feelings of regret that were not previously there.”
You can see why regret regarding any endeavor in life is not productive. Investopedia goes on to highlight regret bias as it is associated with investing; “Admit it, you’ve done this at least once. You were confident that a certain stock was value-priced and had very little downside potential. You put the trade on but it slowly worked against you. Still feeling like you were right, you didn’t sell when the loss was small. You let it go because no loss is a loss as long as you don’t sell the position. It continued to go against you but you didn’t sell until the stock lost a majority of its value. Behavioral economists call it “to regret”.
As humans, we try to avoid the feeling of regret as much as possible, and often we will go to great lengths, sometimes illogical lengths, to avoid having to own the feeling of regret. By not selling the position and locking in a loss, a trader does not have to deal with regret. Research shows that traders were 1.5 to 2 times more likely to sell a winning position too early and a losing position too late, all to avoid the regret of losing gains or losing the original cost basis.
Investopedia discusses how to avoid this Bias and how to never rear its ugly head ever again. They suggest; “Set disciplined trading rules that never change. For example, if a stock trade loses a certain percentage of its value, exit the position. If the stock rises above a certain level, set a target price that will lock in gains if the trade loses a certain amount of gains. Make these levels unbreakable rules and don’t trade on emotion.”
Good advice indeed!!
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