Regret Theory

AAA

DEFINITION of 'Regret Theory'

A theory that says people anticipate regret if they make a wrong choice, and take this anticipation into consideration when making decisions. Fear of regret can play a large role in dissuading or motivating someone to do something.

INVESTOPEDIA EXPLAINS 'Regret Theory'

In investing, the fear of regret can make investors either risk averse or motivate them to take greater risks. For example, suppose that an investor buys stock in a small growth company based only on a friend's recommendation. After six months, the stock falls to 50% of the purchase price, so the investor sells the stock at a loss. To avoid this regret in the future, the investor will ask questions and research any stocks that his friend recommends.

Conversely, say the investor didn't take the friend's recommendation to buy the stock, but the price increased by 50% rather than decreasing. Thus, to avoid the regret of missing out, the investor will be less risk averse and buy any stocks that his friend recommends in the future.

RELATED TERMS
  1. Anchoring

    The use of irrelevant information as a reference for evaluating ...
  2. Prospect Theory

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

    1. One who accepts or assumes the theory of behaviorism (behavioral ...
  4. Growth Company

    Any firm whose business generates significant positive cash flows ...
  5. Risk Averse

    A description of an investor who, when faced with two investments ...
  6. Mental Accounting

    An economic concept established by economist Richard Thaler, ...
RELATED FAQS
  1. How does the risk of investing in the aerospace sector compare to the broader market?

    Investing in the aerospace sector is riskier than investing in the broader market. The most accurate measure of sector volatility, ... Read Full Answer >>
  2. How does a pension income drawdown work?

    While there are similar drawdown plans in the United States, a pension income drawdown plan most commonly refers to a specific ... Read Full Answer >>
  3. What is the most important section in an investment company's prospectus?

    It is important for investors to examine all information contained within an investment company’s prospectus. However, the ... Read Full Answer >>
  4. What is the breakdown of subjects covered on the Series 6 exam?

    The risk-return tradeoff for investing in stocks is the possibility of a return greater than that of a risk-free asset versus ... Read Full Answer >>
  5. How do I calculate the loan-to-value ratio using Excel?

    Investors have a variety of pooled fund investment options, including mutual funds and money market funds, that can meet ... Read Full Answer >>
  6. What option strategies can I use to earn additional income when investing in the ...

    A risk-averse investor should build his retirement portfolio by putting together a well-diversified portfolio and then regularly ... Read Full Answer >>
Related Articles
  1. Active Trading Fundamentals

    An Introduction To Consensus Indicators

    Learn how the herd is almost always wrong, or at least late in jumping on the bandwagon.
  2. Active Trading Fundamentals

    An Introduction To Behavioral Finance

    Curious about how emotions and biases affect the market? Find some useful insight here.
  3. Active Trading Fundamentals

    2 Indexes That Help Assess Market Behavior

    The Herrick Payoff Index and New-High New-Low Index are some of the more interesting (and often complex) measures of crowd psychology.
  4. Personal Finance

    Overcoming Financial Phobia

    If your investment strategy is avoidance, the consequences can be scary.
  5. Investing

    The Case For Stocks Today

    Last week, U.S. equities advanced with the S&P 500 Index notching new records. Investors are now getting nervous with rate and currency volatility spiking.
  6. Investing

    Financial Gifts For Grads: Kindergarten To College

    If you really want to help your grad preparing for the future, consider a present that supports their long-term goals—an early start to financial planning.
  7. Mutual Funds & ETFs

    Why You May Want To Be (And Stay) In Bonds

    Bonds are complicated, and it’s easy to feel intimidated or confused. Fortunately, you don’t need to be a numbers geek to be an informed investor.
  8. Trading Strategies

    How To Cover Your Bases After Making A Trade

    Follow up your trade entry with these time-tested risk management strategies.
  9. Active Trading Fundamentals

    Four Steps To Manage A Downturn In The Market

    A few simple adjustments could end your losing streak as soon as it begins.
  10. Professionals

    Tips for Assessing a Client's Risk Tolerance

    Determining a client’s risk tolerance is a critical piece of the puzzle in designing and appropriate asset allocation.

You May Also Like

Hot Definitions
  1. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  2. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
  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. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
  5. Variance

    The spread between numbers in a data set, measuring Variance is calculated by taking the differences between each number ...
  6. Terminal Value - TV

    The value of a bond at maturity, or of an asset at a specified, future valuation date, taking into account factors such as ...
Trading Center