The Ignominy of Regret and How it Forces You to be Irrational

4 comments Written on May 20th, 2014 by
Categories: General

Regret is a very difficult emotion. You find yourself in a position where you hate something you did that put you in that position. And even when you know you can’t change the past, that pang of regret, of having just a little bit of your past affect so much of your future, kills you.

There are good things about it. When you regret and analyze why you did what you did, you internally build up your resolve to not do it that way again. You learn and become a better person. You sometimes look back and realize how stupid you were and try to make amends. Maybe it’s not too late. The lack of exercise is a regret, but it’s never too late.

But there are so many more bad things about it. You live in the past and refuse to accept the present. You go on a blame game. You try to believe that it was “circumstances” that led you to that decision even when you know it wasn’t. You become a person you hate, because you’re too busy regretting to actually fix whatever that act caused in the first place.

This market is one of regret. Why didn’t I sell my house and buy [abc] stock? It is up 50% since February. I would be able to buy back my house and have enough left over to live a comfortable life!

Or, more subtly, that the market has run away and I’ve missed the bus.

It’ll go down, you think.

It doesn’t. It goes further up.

Then Modi wins. And with such a majority that he *can* fix everything.

The market goes up some more.

Now, your regret hits the roof.

That stock which was at Rs. 10 when you last sold it, is now at Rs. 17. How the heck can you buy it now?

Rs, 17 is like paying 70% more than when you sold it last. Never mind that you bought at 8 and sold at 10. You can’t imagine paying that much more. If only you had held it instead of selling at 10, you would have made 100%+!

And then the stock goes to 20 and you’re furious at the government for letting this happen. All rotten bloody scoundrels.

When it hits 25, you give up. You buy. That regret has killed you, and now it’s gone to 25.

It hits 30. And then 35. You’re there. You’re telling your friends the story. Of how you waited till it crossed 25 and you knew it was that great move coming up. You convince yourself the stock will hit 60 because a random brokerage put out a report saying that. You’re wondering if you should buy more.

The stock retraces to 30. You do nothing.

It goes back up to 35. Regret hits again - why didn’t I buy at 30? You get sick of yourself and buy, double the quantity, by closing your fixed deposits. Of course it will hit 60.

The stock goes to 40. Your friends think you’re a genius. Secretly they buy some shares at 40 too.

The stock falls to 35. You’re hardly bothered.

The stock falls to 30. Now you’re looking at a 2-bagger because 60 is the target. You buy more, but hesitantly.

Then the stock crashes to 25. You’re sick of this stupid silly stock market. The stock’s real value is Rs. 60. You decide to forget about the market for a few years.

The stock goes to 20. Screw it.

And then 15.

And then 10.

And you’re still holding it.

Your friends are holding it too.

All because you, and they, didn’t want to regret missing this fantastic bus.

The point is that regret causes you to lose you mind. The fear that you will regret something makes you act irrationally. We do that all the time in life. Most religion is based on regret - that if you don’t do some Godly act, you will be questioned in the afterlife, or go to hell, or be reborn as a cockroach, and then you’ll regret not having done that Godly act, so do it now. It’s that powerful an emotion. You don’t know what you’re doing, but you sure as hell don’t want to regret not doing it.

You also irrationally anchor yourself. If you sold a stock at Rs. 10, what difference does it make if the stock is 17 today? Think of it as a different stock entirely. Your last sale has nothing to do with the price of the stock today, and you shouldn’t care about it. Yet, you find yourself balking at the concept of a purchase.

If you think that I don’t feel regret because I trade more, you’re wrong. I feel regret all the time. I almost like the feeling now. Because it instantly triggers my warning bells - why am I feeling this way? Wouldn’t I buy this stock if it was named something else? Why don’t I buy first with a 10% stop loss?

But more often than not, the regret is silly. If I sold something, I obviously found something else to invest the money in. Those returns are sometimes as good as the stock’s upward move itself!

I wrote this on twitter today:

  • You will always feel regret. Like I regret getting out of Apollo at 96. I did the right thing though. I should have got back on, that's all.
  • But again, I found other stocks. There's always opportunity. There is always money to be made. Regret can kill your discipline.
  • Never say a stock's too expensive just because it's above the price you last sold it at. Your anchor is your downfall.

So what would you do with your regret today? If you aren’t as invested as you think you should be, would you buy shares now? Or would you rather wait for the proverbial dip, at which time you’ll buy, and redeem yourself as markets go back up?

My answer is to buy anyway and keep a strict 10% stop loss. Yeah, I could regret that too.

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About the Author:
http://www.capitalmind.in
The man behind Capital Mind. Deepak is a co-founder at MarketVision, a financial knowledge company. Deepak also provides data research and consulting services, and now lives in Bangalore. Connect with him at deepakshenoy@gmail.com.

4 comments “The Ignominy of Regret and How it Forces You to be Irrational”

Hey Deepak,
Nice writeup. Feels good to read such things first in the morning. Since last year I have been in such a situation, regret and loss aversion used to haunt, but not any more, after reading your posts. Thanks. Keep it up.

So, we regret because we anchor? and suffer from endowment bias? Isn’t envy playing a part too?

Hi Deepak,

Thanks for writing one of the best master pieces, to which, every market participant can relate himself/herself to.

After being in the market for nearly 20 years, I have overcome that – “regret” only last year (not because I liked it, but because I had been paying too much of tuition fees to the market all these years) and believe me, my balance sheet has improved.

I will archive your article in my “must read b4 market opens” list and I’m sure it would help me a lot.

Thanks once again.

With Regards,
Praveen