Regret avoidance

• It is a cognitive phenomenon in which investors, hold onto losing

positions too long in order to avoid admitting errors and realizing
losses. Basically, this bias seeks to forestall the pain of regret
associated with poor decision making.

• Regret avoidance is a theory used to explain the tendency of investors

to refuse to admit that a poor investment decision was made.
 Regret
The Story of John and Mary
• John owns shares of Company A. He considers selling his
shares and buying stock in Company B, but decides
against it. He now finds he would have been better off by
$20,000 if he had switched to Company B
• Mary owns shares in Company B, but switched
to Company A. She finds she would have been better off
by $20,000 if she had kept her shares of Company B
• Who is more upset, John or Mary?
 Regret
• Answer: Mary

• People typically regret errors of commission more than

errors of omission.
AVOID
• developing a strong portfolio plan and understanding your risk
tolerance