Eliminate Regret

Consider the hypothetical example from Chapter 3 of Levy’s book: you rationally decide not to buy insurance for your iPhone, and the phone breaks a few months later. This decision illustrated the maxim that good decisions sometimes result in bad outcomes. An important implication of this maxim is that as decision makers we should not regret sound decisions that lead to poor outcomes. In this case, if you made the decision rationally (taking into account the probability of the phone breaking, the different costs involved under the break and no-break scenarios, and your level of risk aversion), you should feel no regret for your decision. You might feel bad for the outcome, but if the decision was wise, it does not become less wise because of an unlucky outcome.[83]

A corollary of the “avoid regret when a good decision leads to a bad outcome” is that you should not take pride in poorly made decisions that work out well. Moreover, even if a bad decision leads to a bad outcome, wallowing in regret is not productive. You want to reflect and learn from the bad decision but then move on. This is what Yinglan Tan, a former student of Richard’s and a Singapore-based venture capitalist, tries to do in his work: “Venture capitalists play the long game. In the process it is inevitable that misses are made or bets don’t pan out. All the same, I have learned not to let any singular decision weigh down on me. Instead, I look at these misses as an opportunity to learn, and this is an exercise I regularly go through with my team. These moments that could have been occupied with regret are greater sources of insight than one would initially suspect, and are critical to shaping how we proceed with finding the best companies to work with moving forward.”

In sum, regret is a wasteful emotion regardless of whether the bad outcome is a result of a good or a bad decision. Realizing you made a mistake and taking action to correct it is good, but dwelling on the mistake does not do any good. Perhaps even worse, our desire to avoid regret in the future might lead us to make suboptimal decisions in the present. In the iPhone example, you might decide to buy insurance not because it makes rational sense to do so, but because you could avoid the regret you would feel were the phone to break in the future. This is no sound basis for making decisions.

In an article about rational decision theory produced as a tribute to Howard Raiffa, the giant in the field of decision analysis who introduced Richard to the field, Richard wrote, “ I believe that a conscientious attempt to banish regret from one’s decision calculus is one of the prime benefits of fully embracing decision analysis, of acting as Howard would recommend.”[84]

Anticipation of regret can lead to well-documented departures from rational decision making. Two are worth mentioning: overweighting errors of commission relative to those of omission, a contributor to status quo bias; and the sunk-cost fallacy. Feelings of regret are often far stronger when a bad outcome results from a conscious choice, as opposed to doing nothing. Consider two people who miss the same gain in Amazon stock: Chris sells before the increase, while Pat considers buying but does not. Chris is likely to feel more regret. His error of commission led to far greater mental discomfort and self-blame than did Pat’s error of omission, though the financial costs were the same. Given this tendency, we are too eager to stand pat across a vast range of circumstances. Thus, status quo bias leads us astray.

Regret avoidance, as this phenomenon is sometimes called, also contributes to the famed sunk-cost fallacy, a popular subject in introductory economics textbooks. The sunk cost fallacy occurs when you use the fact that you have previously invested resources (time, money or effort) on an activity to justify further investment in the activity.[85] You have fallen victim to this fallacy if you have ever followed through with plans to go to the theater just because you already purchased the tickets (even though the weather is foul and the play has received poor reviews). Or you hold on to a bad investment (or even worse, put in additional money) because you had already made the investment. Or you continue a personal relationship, though the relationship has soured, just because the relationship has persisted many years.

While there are many reasons behind our tendency to fall prey to the sunk-cost fallacy, the fear of experiencing regret if we make the wrong choice is an important one. As Mark Thompson, a former student of Richard’s, bridge partner, professor and later co-investor, put it: “We should steer clear of the sunk-cost fallacy: the common tendency to persevere in activities or allocations that have initially been disappointing, because we want to avoid the regret of having made a bad decision or that of feeling that what we did was in vain. This Zeckhauserian precept has been of value in judging to what extent and whether I and my colleagues and company should have persisted in investments, writing projects, research undertakings, and relationships.”