Regret Theory

Fear of regret, or simply regret theory deals with the emotional reaction people experience after realizing they've made an error in judgment.

Faced with the prospect of selling a stock, investors become emotionally affected by the price at which they purchased the stock.

• So, they avoid selling it as a way to avoid the regret of having made a bad investment, as well as the embarrassment of reporting a loss.  We all hate to be wrong, don't we?

What investors should really ask themselves when contemplating selling a stock is:
"What are the consequences of repeating the same purchase if this security were already liquidated and would I invest in it again?"

• If the answer is "no," it's time to sell; otherwise, the result is regret of buying a losing stock and the regret of not selling when it became clear that a poor investment decision was made – and a vicious cycle ensues where avoiding regret leads to more regret.

• Regret theory can also hold true for investors when they discover that a stock they had only considered buying has increased in value.

Some investors avoid the possibility of feeling this regret by following the conventional wisdom and buying only stocks that everyone else is buying, rationalizing their decision with "everyone else is doing it."

• Oddly enough, many people feel much less embarrassed about losing money on a popular stock that half the world owns than about losing money on an unknown or unpopular stock.