Regret Avoidance

Totally different from egret avoidance. You do not want to be standing beneath them when a flock flies over your head, especially after they've just eaten Thai food.

We win some, we lose some, right? The numbers tell us that’s the reality of investing. Yet some investors find those numbers too hard to swallow...so much so that they’re not even willing to admit their poor investment decisions to themselves.

This is regret avoidance: when an investor refuses to acknowledge not-so-smart investment decisions because it’s just too painful. While regret avoidance is more common in finance, in economics we associate it with the sunk-cost fallacy. You put a ton of money and thought on the line, and you really thought things were going to work out...so you didn’t cash out while you were still ahead.

Regret avoidance explains why investors sometimes keep investments longer than they should, even with red flags waving in their faces. They might even put more money on the line, even doubling down, hoping things will take a turn for the better.

It’s kind of like how people sometimes stay in relationships longer than they should: they just don’t want to admit that maybe the relationship is already over. After you sink so much energy, time, and money into something, it can be hard to let it go...even if that’s clearly the most rational choice.

Regret avoidance can happen anywhere with any investment: the stock market, a mortgage, or even a business. Cut your losses if your ship is sinking. Homo economicus would be proud.