Investor regret: The role of expectation in comparing what is to what might have been
– Wen-Hsien Huang — Marcel Zeelenberg
Investors, like any decision maker, feel regret when they compare the outcome of an investment with what the outcome would have been had they invested differently. We argue and show that this counterfactual comparison process is most likely to take place when the decision maker’s expectations are violated.
We found that decision makers were influenced only by forgone investment outcomes when the realized investment fell short of the expected result. However, when their investments exceeded prior expectations, the effect of foregone investment on regret disappeared.
In addition, Experiment 4 found that individual differences in the need to maximize further moderated the effects of their expectations, such that maximizers always take into account the forgone investment.
What does this tell us, and how can we use it?
- We’re most likely to look for comparisons feel it in falling or sideways markets, when our expectations aren’t being met. And unfortunately, cash will always be a willing accomplice to our regrets, providing a “what could have been” investment.
- Conversely, we’re unlikely to regret underperforming in rising markets, even if the market does better than us.
- Some of us (“maximizers”) need to look out for this tendency more than others – and you know this ahead of time by taking a maximizing/satisficing test.