Regret Theory

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.

BREAKING DOWN '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. Regret Avoidance

    A theory of investor behavior that attempts to explain why investors ...
  2. One Night Stand Investment

    A purchased security that was intended for a long-term investment, ...
  3. Trading Psychology

    The emotions and mental state that dictate success or failure ...
  4. Friends and Family Shares

    A company's stock that is offered to preferred individuals, prior ...
  5. Prospect Theory

    A theory that people value gains and losses differently and, ...
  6. Buying Forward

    An investment strategy that involves the buying of money market ...
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. Investing Basics

    Why There Are Few Sell Ratings On Wall Street

    We outline reasons that may show why enforcing more sell ratings isn't guaranteed to increase Wall Street's objectivity.
  3. 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.
  4. 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.
  5. Investing Basics

    8 Common Biases That Impact Investment Decisions

    Behavioral biases hit us all as investors and can vary depending upon our investor personality type.
  6. Financial Advisors

    Avoid These Top Retirement Mistakes

    Most people spend years planning for their retirement but make some common mistakes that prove costly over the long run. Here's how to avoid them.
  7. Mutual Funds & ETFs

    6 Proven Methods For Selling Stocks

    These common techniques can help investors take some of the emotion out of deciding when to sell a stock.
  8. Fundamental Analysis

    7 Controversial Investing Theories

    We take a closer look at the theories that attempt to explain and influence the market.
  9. 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 ...
  10. Investing Basics

    Why You Shouldn't Manage Your Friends' Money

    Your pals may like your returns, but it isn't wise for you to manage their money.
RELATED FAQS
  1. What is the difference between a buy-side analyst and a sell-side analyst?

    The main difference between these two types of analysts is the type of firm that employs them and the people to whom they ... Read Answer >>
  2. What is the difference between risk avoidance and risk reduction?

    Learn what risk avoidance and risk reduction are, what the differences between the two are, and some techniques investors ... Read Answer >>
  3. What are the differences between weak, strong and semi-strong versions of the Efficient ...

    Discover how the efficient market theory is broken down into three versions, the hallmarks of each and the anomalies that ... Read Answer >>
  4. If I believe retail sector companies are overvalued how can I profit from a fall ...

    Examine the various trading strategies that can be employed by an investor who anticipates a decline in stock prices in the ... Read Answer >>
  5. Under what circumstances is short selling advisable?

    Find out when short selling a stock is profitable and what an investor should keep in mind before deciding to pursue a short ... Read Answer >>
  6. What is the chaos theory?

    The chaos theory is a complicated and disputed mathematical theory that seeks to explain the effect of seemingly insignificant ... Read Answer >>
Hot Definitions
  1. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage ...
  2. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  3. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  4. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  5. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  6. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
Trading Center