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 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. Bonds & Fixed Income

    How to Diversify with Muni Bond ETFs

    Thinking of diversifying with bonds? Consider these muni bond ETFs.
  6. Mutual Funds & ETFs

    How To Build A Bond Ladder?

    Bond laddering is a strategy used when building a portfolio: an investor can spread out interest rate risk and create a stream of cash flows for income.
  7. Fundamental Analysis

    How Investment Risk Is Quantified

    FInancial advisors and wealth management firms use a variety of tools based in Modern portfolio theory to quantify investment risk.
  8. Investing

    Rethinking About Retirement Investing?

    There are plenty of reasons to rethink your retirement investing, wherever you fall on the spectrum between fatalistic acceptance and cheerful confidence.
  9. Investing

    What is Portfolio Management?

    Portfolio management is the act of maximizing the return on a portfolio. This is done with trading decisions made for the marketable securities in that portfolio. A portfolio manager, or a team ...
  10. Savings

    Will Technology Displace Human Financial Management?

    Technology is creating more tools that help individuals avoid the common financial management and money management firms.

You May Also Like

Hot Definitions
  1. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  2. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  3. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  4. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  5. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
  6. Accrued Interest

    1. A term used to describe an accrual accounting method when interest that is either payable or receivable has been recognized, ...
Trading Center