Regret Theory

Becoming an adult and going out on our own for the first time can be so very liberating. All of a sudden, we can eat taquitos for breakfast, lunch, and dinner, and there’s no one there to tell us we can’t. We can stay out until 3 am with our friends, even if we have a 7:00 class the next morning. But just because we can do something, it doesn’t always mean we should. And after enough bouts of taquito-induced indigestion, or after we miss enough morning classes or get low scores on enough exams and assignments, we might decide that maybe we should cut back on the taquito binges and crazy late nights. We know we’re going to feel bad about it later on, so we stop doing it as much.

This phenomenon is known as “regret theory,” and it basically says that we’re a whole lot less likely to do something if we know we’re going to regret it.

On the flip-side, regret theory can also make us a lot more likely to do something if we think we’ll regret not doing it. We’ve all heard of FOMO, right? FOMO is a form of regret theory: we don’t want to miss out on something that could be awesome. Regret theory is a big deal in the world of psychology, and that includes financial psychology. It can either make us super risk-averse—we don’t want to make a bad decision, lose money, and regret it—or it can make us super risk-inclined. We don’t want to be the ones to miss out on a big investment opportunity, so we buy or sell where maybe others wouldn’t.