Regret Impact on Investor Behavior

Even though people today have limitless amounts of information and overwhelming amounts of resources to make the best, informed, decisions, people experience regret from the decisions we make like never before. Almost a third of Americans regret their decisions regarding major life choices, such as finances. Regret theory suggests that human behavior is driven by fear of regret, meaning people will sometimes make poor decisions and take unnecessary risks to avoid regret, but sometimes not take opportunities to avoid disappointment as well. For example, one might make a decision to sell a stock of a particular company, thinking it will soon drop, but instead it skyrockets. The person has a strong feeling of regret, which later drives one to make potentially unweighted and impulsive decisions based on the previous experience of regret to avoid that feeling in the future. That is one of the reasons why stock trading can be very risky- it is often based on regret theory, which is what Cary Frydman and Colin Camerer studied in a research study called, “Neural Evidence of Regret and Its Implications for Investor Behavior”. 

Well, Dr. Sweis found in his research study called, “Mice Learn to Avoid Regret,” that people are not the only ones experiencing this regret avoidance behavior. Dr. Sweis created a Restaurant Row, where mice had to learn how to manage their limited time to get enough food, since if they did not manage their time wisely and waited longer for more tasty food options, they would be hungry after, which will lead to regretting their decision making. Mice learned to make optimal strategies to get enough food and avoid the regret from their decisions. For researchers, this meant that accessing decisions and making strategies that would minimize regret was not a unique ability only accessible to humans- mice can experience regret theory too. 

One of the implications that makes this research exceptionally valuable is related to the financial market. Humans, just like mice, can make inferences from past choices to avoid regret. In a study done by Cary Frydman and Colin Camerer, researchers had subjects trade fake stocks with a limited amount of money. Subjects had to weigh benefits and risks and make a decision about buying and selling stocks to maximize reward.  Prior to the start of the experiment, subjects had an opportunity to observe the stock market flow to familiarize with patterns to help them make informed decisions in the study. What researchers found was that when subjects saw that the stock they sold actually increased in price later on, they experienced regret, which showed by lower activity in the ventral striatum, which encodes reward prediction errors. In addition, the lower neural activity in the ventral striatum correlates with how much subjects were willing to repurchase. This study showed that there is a biological approach to predicting financial behavior, since the consequence of investors’ actions actually alter brain activity to push investors to change their strategies. 

Learning how to trade stocks and distribute income into profitable investments has become a popular strategy to increase income for people of all ages and backgrounds. It is a common misconception that studying finance and investments is just like mathematics, where there is a clear and predictable strategy to success as long as one can put numbers in a formula and calculate their pathway to profits. However, learning from the experiments or Dr. Sweis, Cary Frydman and Colin Camerer, it is clear that not only are humans more alike to mice than one may think, but also how much of decision making can come from places that are often not taken into account. Learning about theory of regret and how exactly the brain processes new strategies is necessary to make knowledgeable decisions about finances and so many other aspects of our lives.  

Work Cited

Chen, James. “What Is Regret Theory?” Investopedia, Investopedia, 29 Aug. 2020, www.investopedia.com/terms/r/regrettheory.asp. 

Cary Frydman, Colin Camerer, Neural Evidence of Regret and Its Implications for Investor Behavior, The Review of Financial Studies, Volume 29, Issue 11, November 2016, Pages 3108–3139, https://doi.org/10.1093/rfs/hhw010

Faust, Jeff. “One-Third of Americans Regret Major Life Choices, But Many Embrace Newfound Opportunity to ‘Rechart’ Course.” One-Third of Americans Regret Major Life Choices, But Many Embrace Newfound Opportunity to "Rechart" Course | Business Wire, 23 May 2016, www.businesswire.com/news/home/20160523005192/en/One-Third-of-Americans-Regret-Major-Life-Choices-But-Many-Embrace-Newfound-Opportunity-to-%E2%80%9CRechart%E2%80%9D-Course. 

Sweis BM, Thomas MJ, Redish AD (2018) Mice learn to avoid regret. PLoS Biol 16(6): e2005853. https://doi.org/10.1371/journal. Pbio.2005853