Regret Avoidance

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.

BREAKING DOWN '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. Regret Theory

    A theory that says people anticipate regret if they make a wrong ...
  2. Behaviorist

    1. One who accepts or assumes the theory of behaviorism (behavioral ...
  3. Behavioral Funds

    Definition of behavioral funds.
  4. Behavioral Economics

    The study of psychology as it relates to the economic decision ...
  5. Behavioral Accounting

    An accounting method which takes into account key decision makers ...
  6. Behavioral Finance

    A field of finance that proposes psychology-based theories to ...
Related Articles
  1. Active Trading Fundamentals

    Understanding Investor Behavior

    Discover how some strange human tendencies can play out in the market, posing the question: are we really rational?
  2. Active Trading Fundamentals

    Why Investors Stick With Failing Stocks

    Investors often delude themselves into sticking with bad decisions. Find out why this happens and how you can avoid this trap.
  3. Investing Basics

    Modern Portfolio Theory vs. Behavioral Finance

    Modern portfolio theory and behavioral finance represent differing schools of thought that attempt to explain investor behavior. Perhaps the easiest way to think about their arguments and positions ...
  4. Investing

    7 Ways Your Emotions Skew Your Business Decisions

    Important decisions such as making a key investment, increasing production or expanding into new lines are all clouded by human emotion. Can you stay cool under pressure?
  5. Active Trading Fundamentals

    Behavioral Finance: Background

    By Albert PhungBefore we go over the specific concepts behind behavioral finance, let's take a more general look at this branch of finance. In this section, we'll examine how it compares to conventional ...
  6. Active Trading Fundamentals

    Behavioral Finance: Introduction

    By Albert PhungAccording to conventional financial theory, the world and its participants are, for the most part, rational "wealth maximizers". However, there are many instances where emotion ...
  7. Investing Basics

    A Quick Guide On Behavioral Funds

    Investopedia explores the working of behavioral funds, their benefits and risks, and an analysis of their past returns.
  8. Active Trading Fundamentals

    Behavioral Finance

    Learn the science behind irrational decision making and how you can avoid it.
  9. Active Trading Fundamentals

    Trade On Support For The Best Exit Strategy

    Find your sound exit strategy based on support and resistance levels, while understanding the psychology behind them.
  10. Active Trading Fundamentals

    Is Your Psyche Ready For A Bull Market?

    Not all investors are mentally prepared for when a much-awaited bull market finally comes charging in.
RELATED FAQS
  1. How does behavioral economics treat risk aversion?

    Learn about the relationship between decision-making and risk, as described by one of the foundational theories in behavioral ... Read Answer >>
  2. How can you avoid the sunk cost trap?

    Read out how the sunk cost trap works, an example of how it affects decision-making and how to avoid it when making economic ... Read Answer >>
  3. What are common investing mistakes in bear markets?

    Learn why investing in a tumultuous market can be challenging even for the most experienced investors. Avoiding these common ... Read Answer >>
  4. What are common examples of bad decisions made due to the sunk cost fallacy?

    Learn more about the ways some businesses reject proper analysis in favor of the sunk cost fallacy, and discover ways to ... Read Answer >>
  5. How can I tell if I'm an emotional investor?

    Successful investors possess the important trait of emotional stability, which means that they base their investment decisions ... Read Answer >>
  6. How are business decisions made in a partnership?

    Understand how partners in a business can tackle decision making, and learn the options available for partnerships to develop ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center