Regret Avoidance

AAA

DEFINITION of 'Regret Avoidance'




A theory of investor behavior that attempts to explain why investors refuse to admit to themselves that they've made a poor investment decision so they don't have to face the unpleasant feelings associated with that decision. Regret avoidance causes investors to not correct bad decisions, which can make those decisions worse. Regret avoidance is the result of cognitive dissonance. Regret avoidance also provides an alternative to economists Daniel Kahneman and Amos Tversky's prospect theory, which provides another explanation of why individuals make irrational decisions.

INVESTOPEDIA EXPLAINS 'Regret Avoidance'

The study of behavioral finance helps us understand actions like regret avoidance. Being aware of our behavioral quirks and the ways we can let emotions irrationally influence our behavior can help us make better decisions. For example, it can help us avoid throwing good money after bad in an attempt to emotionally justify a bad investment decisions. Having a basic understanding of behavioral finance, along with holding a diversified portfolio with a comfortable level of risk, can limit the probability of engaging in destructive regret avoidance behavior.



RELATED TERMS
  1. Rational Choice Theory

    An economic principle that assumes that individuals always make ...
  2. Prospect Theory

    A theory that people value gains and losses differently and, ...
  3. Behavioral Finance

    A field of finance that proposes psychology-based theories to ...
  4. Behavioral Economics

    The study of psychology as it relates to the economic decision ...
  5. Market Psychology

    The overall sentiment or feeling that the market is experiencing ...
  6. Market Sentiment

    The overall attitude of investors toward a particular security ...
RELATED FAQS
  1. What techniques are most useful for hedging exposure to the banking sector?

    The banking sector moves in the same direction as the broader market, but its volatility is much lower. The sector's stability ... Read Full Answer >>
  2. What is the variance/covariance matrix or parametric method in Value at Risk (VaR)?

    The parametric method, also known as the variance-covariance method, is a risk management technique for calculating the value ... Read Full Answer >>
  3. How can you avoid the sunk cost trap?

    Avoid the sunk cost trap by recognizing that any investment you've made into a project or decision to date should not be ... Read Full Answer >>
  4. During what stage of the economic cycle should I invest in the drugs sector?

    Invest in the drugs sector during the expansionary stage of the economic cycle, when the broader market is rising. The absolute ... Read Full Answer >>
  5. What is backtesting in Value at Risk (VaR)?

    The value at risk is a statistical risk management technique that monitors and quantifies the risk level associated with ... Read Full Answer >>
  6. How much variance should an investor have in an indexed fund?

    An investor should have as much variance in an indexed fund as he is comfortable with. Variance is the measure of the spread ... Read Full Answer >>
Related Articles
  1. Active Trading Fundamentals

    4 Psychological Traps That Are Killing Your Portfolio

    Sometimes your largest financial hurdle is our head. Learn about the common mind-traps that trip up investors.
  2. Active Trading Fundamentals

    3 Psychological Quirks That Affect Your Trading

    There are human tendencies that can block the road toward achieving our financial goals. Here's how to get around them.
  3. Active Trading Fundamentals

    An Introduction To Behavioral Finance

    Curious about how emotions and biases affect the market? Find some useful insight here.
  4. Fundamental Analysis

    Explaining Expected Return

    The expected return is a tool used to determine whether or not an investment has a positive or negative average net outcome.
  5. Mutual Funds & ETFs

    U.S. Investors Are Seeking Opportunities Overseas

    A latest analysis leads to believe that many investors are applying a spring cleaning approach to their portfolios, rebalancing as the 1st quarter ended.
  6. Investing

    Three Portfolio Moves To Consider Now

    What portfolio moves should you consider making as the 2nd quarter kicks off? Before we focus on the future, let’s first reflect on the 1st Q surprises.
  7. Investing Basics

    Manage Investments And Modern Portfolio Theory

    Modern Portfolio Theory suggests a static allocation which could be detrimental in declining markets, making it necessary for continuous risk assessment. Downside risk protection may not be the ...
  8. Chart Advisor

    Buying Opportunities on Upside Wedge Breakouts

    Find buying opportunities in these stocks, which have seen their prices break out of long-term declining wedge patterns.
  9. Stock Analysis

    Small-Caps and Dividends: Perfect Together

    For investors, small-caps shouldn’t be just about growth. They can be powerful income tools, as well.
  10. Mutual Funds & ETFs

    Is Amazon a Prime Pick for Your Portfolio?

    Eyeing Amazon? Thanks to innovation and diversification, it has high odds of being a long-term winner. Here's why.

You May Also Like

Hot Definitions
  1. Fixed-Income Arbitrage

    An investment strategy that attempts to profit from arbitrage opportunities in interest rate securities. When using a fixed-income ...
  2. Venture-Capital-Backed IPO

    The selling to the public of shares in a company that has previously been funded primarily by private investors. The alternative ...
  3. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless ...
  4. Market Failure

    An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers ...
  5. Unsystematic Risk

    Company or industry specific risk that is inherent in each investment. The amount of unsystematic risk can be reduced through ...
  6. Security Market Line - SML

    A line that graphs the systematic, or market, risk versus return of the whole market at a certain time and shows all risky ...
Trading Center