Jessica Hagy makes a great diagram illustrating the Regret Theory in her Wish you had, or wish you hadn’t? post.
Regret theory as defined by investopedia.com is ``A theory that says people anticipate regret if they make a wrong choice, and take this anticipation into consideration when making decisions. Fear of regret can play a large role in dissuading or motivating someone to do something."
How does this apply to investing? Dr. John Hussman has a befitting explanation,
``Anytime you discover you are taking too much risk, realize in advance that you will experience some level of regret as you correct it, if you sell your first portion and the market advances, you'll regret having sold anything. If you sell your first portion and the market continues to decline, you'll regret that you didn't sell everything. The way to keep from being "paralyzed" in the financial markets is to realize in advance that gradually changing an investment position will always involve regret. It is better to "lock in" an acceptable level of regret than to risk an unacceptable loss."
Regret theory as defined by investopedia.com is ``A theory that says people anticipate regret if they make a wrong choice, and take this anticipation into consideration when making decisions. Fear of regret can play a large role in dissuading or motivating someone to do something."How does this apply to investing? Dr. John Hussman has a befitting explanation,
``Anytime you discover you are taking too much risk, realize in advance that you will experience some level of regret as you correct it, if you sell your first portion and the market advances, you'll regret having sold anything. If you sell your first portion and the market continues to decline, you'll regret that you didn't sell everything. The way to keep from being "paralyzed" in the financial markets is to realize in advance that gradually changing an investment position will always involve regret. It is better to "lock in" an acceptable level of regret than to risk an unacceptable loss."
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