I wish I had picked a different airline or maybe shelled out more money for a better seat. (I’m writing this squeezed into a coach seat near the lavatory on a six-hour flight to attend the Behavioral Finance Symposium in San Francisco.) I wish I had known six months ago that people were much more interested in big financial planning decisions and budgeting than real estate so we could’ve better focused our development efforts. I regret some impatient words I said to one of my students last week.
Fear of regret has always slowed down my decision-making. My interest in decision theory has been to improve the speed and quality of my decisions while reducing the risk of regret.
So, what is regret? Most consider it first an emotion. A feeling of sadness, shame or embarrassment over one’s actions. Some people, like my wife, are blessed with an immunity to this feeling. “It’s not my nature to regret things,” she tells me.
But regret is more than a feeling. It’s also a recognition that our actions are not always consistent with the kind of person we want to be. I’m thinking of the “white” lies we tell and the relevant bits of information we neglect to share. It’s acts of commission and omission that harm others and ourselves.
We sometimes experience regret unnecessarily. Let’s be fair: For an action to be truly regrettable, it has to meet these three tests:
• Agency: we had the freedom to make a higher-quality decision
• Power: we had the ability to implement the decision
• Process Failure: we failed to perform enough diligence, or follow the right process, to make a high quality decision
The outcome of the decision is irrelevant to whether we ought to experience regret.
The decision to bet our life’s savings on a roulette spin is regrettable, even if we win: the excessive risk means our decision process was flawed. Of course, we might not experience feelings of regret immediately in that scenario. It might wait until after the euphoria of winning has passed, when the enormity of our folly is more apparent.
There’s a third kind of regret. In decision theory, regret is quantifiable. We can often measure, or at least estimate, how much better off we’d be if only we had made a different decision.
For example, let’s say I decided to invest my roulette winnings in the stock market, which can rise or fall 25 percent. My alternative is Treasury Notes yielding 2 percent. Let’s say my luck runs out and stocks fall 25 percent. My regret is not just the loss in equities (25 percent), but also my lost opportunity to invest in treasury notes (2 percent). My regret is a painful 27 percent.
If my objective were to minimize my maximum regret, I would wise to invest in T-Notes instead. The most regrettable scenario then is when stocks rise 25 percent. My regret then is just the 23 percent additional return I could have earned if I had invested in stocks. This is painful, but still better than the 25 percent maximum regret I might suffer with stocks.
Thankfully, there are ways to limit the risk of all three kinds of regret. Before the decision, we can:
• Write down the rationale. This slows us down, engaging the System Two processes that can limit the effects of biases and noise, which can reduce decision quality. (Judgment in Managerial Decision Making, p.99)
• Practice mindfulness and accountability. This has a similar, positive effect on our decision quality.
• Apply a mini-max regret strategy discussed above.
Of course, no matter how hard we try, we humans will still make some poor decisions. After the decision, we can still:
• Learn from our mistakes. We can change the processes, habits and conditions under which we make decisions.
• Resolve to return to our true selves, the ideal individual we aspire to be, by changing our habits and actions.
• Make amends. When our regret arises from having wronged another, an apology or restitution can be a good start.
One of our most well-read articles over the past year was about our decision to send our daughter to an expensive private college. It turns out that she didn’t like the school and left after one semester. Do I regret it? Only a little: I only wish we had thought to limit our risk with an agreement that she’d have to determine positively whether to stay or go before the deadline for withdrawals with partial refunds. Live and learn!
“Of all the words of mice and men, the saddest are, “It might have been.” ― Kurt Vonnegut
What does regret mean to you? Does it motivate better decision-making or is it just discouraging? Please comment below, sign up for email updates and share this with anyone who wants to make better decisions. Sign up to try our decision-tool prototype here. You won’t regret it!