Regret Theory

A A A

DEFINITION

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

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. Risk Averse

    A description of an investor who, when faced with two investments with a similar ...
  2. Growth Company

    Any firm whose business generates significant positive cash flows or earnings, ...
  3. Mental Accounting

    An economic concept established by economist Richard Thaler, which contends ...
  4. Prospect Theory

    A theory that people value gains and losses differently and, as such, will base ...
  5. Anchoring

    The use of irrelevant information as a reference for evaluating or estimating ...
  6. Behaviorist

    1. One who accepts or assumes the theory of behaviorism (behavioral finance ...
  7. Misselling

    The ethically questionable practice of a salesperson misrepresenting or misleading ...
  8. Compound Annual Growth Rate - CAGR

    The year-over-year growth rate of an investment over a specified period of time. ...
  9. Return On Investment - ROI

    A performance measure used to evaluate the efficiency of an investment or to ...
  10. Mean-Variance Analysis

    The process of weighing risk against expected return. Mean variance analysis ...
Related Articles
  1. An Introduction To Consensus Indicators ...
    Active Trading Fundamentals

    An Introduction To Consensus Indicators ...

  2. An Introduction To Behavioral Finance
    Active Trading Fundamentals

    An Introduction To Behavioral Finance

  3. 2 Indexes That Help Assess Market Behavior ...
    Active Trading Fundamentals

    2 Indexes That Help Assess Market Behavior ...

  4. Overcoming Financial Phobia
    Personal Finance

    Overcoming Financial Phobia

  5. Warren Buffett's Bear Market Maneuvers
    Insurance

    Warren Buffett's Bear Market Maneuvers

  6. Understand Your Role In The Investing ...
    Personal Finance

    Understand Your Role In The Investing ...

  7. Does Higher Risk Really Lead To Higher ...
    Active Trading

    Does Higher Risk Really Lead To Higher ...

  8. A Career In Real Estate Portfolio Management
    Personal Finance

    A Career In Real Estate Portfolio Management

  9. Using Economic Capital To Determine ...
    Personal Finance

    Using Economic Capital To Determine ...

  10. Investing In Commodities Without the ...
    Mutual Funds & ETFs

    Investing In Commodities Without the ...

comments powered by Disqus
Hot Definitions
  1. Quanto Swap

    A swap with varying combinations of interest rate, currency and equity swap features, where payments are based on the movement of two different countries' interest rates. This is also referred to as a differential or "diff" swap.
  2. Genuine Progress Indicator - GPI

    A metric used to measure the economic growth of a country. It is often considered as a replacement to the more well known gross domestic product (GDP) economic indicator. The GPI indicator takes everything the GDP uses into account, but also adds other figures that represent the cost of the negative effects related to economic activity (such as the cost of crime, cost of ozone depletion and cost of resource depletion, among others).
  3. Accelerated Share Repurchase - ASR

    A specific method by which corporations can repurchase outstanding shares of their stock. The accelerated share repurchase (ASR) is usually accomplished by the corporation purchasing shares of its stock from an investment bank. The investment bank borrows the shares from clients or share lenders and sells them to the company.
  4. Microeconomic Pricing Model

    A model of the way prices are set within a market for a given good. According to this model, prices are set based on the balance of supply and demand in the market. In general, profit incentives are said to resemble an "invisible hand" that guides competing participants to an equilibrium price. The demand curve in this model is determined by consumers attempting to maximize their utility, given their budget.
  5. Centralized Market

    A financial market structure that consists of having all orders routed to one central exchange with no other competing market. The quoted prices of the various securities listed on the exchange represent the only price that is available to investors seeking to buy or sell the specific asset.
  6. Balanced Investment Strategy

    A portfolio allocation and management method aimed at balancing risk and return. Such portfolios are generally divided equally between equities and fixed-income securities.
Trading Center