Regret aversion bias stems from the fear of omission or commission. In other words, it is the prospect of failing by omitting an opportunity or committing to a mistake that we strive to avoid. The concern of committing to a failure or poor decision (errors of commission), for example, such as making a bad investment, can loom over one’s preferences. People sometimes think less about making a good decision and more about not doing something that would have turned out right (errors of omission). This anticipation of regret over making the wrong choice is often factored into our decision-making as a form of emotional insurance.

Regret aversion can also have positive effects, where the possibility of regret can act as a motivator in engaging in healthy behaviors such as exercise.³ For those who exercise, the sense of “if I don’t go to the gym now, I know I’ll regret it later,” might be all too familiar. So, while cognitive biases often highlight people’s tendencies to prioritize the present over the future, regret aversion emerges as a caveat where potential regret can guide a decision where a future state is prioritized - we don’t want our future self to experience regret, even if it means sacrificing present consumption. This could actually motivate individuals to save more, as they may seek to eliminate the possibility of regretting not having saved at some future date.

However, regret aversion can lead people to engage in seemingly irrational behavior out of excessive fear of future regret. For example, many pension savers in the UK recently took out their lump-sum tax-free allowance prematurely over rumors that the new government was going to scrap the relief program in their upcoming budget. When the rumors turned out to be untrue, many people were left regretting their decision to pull their money out as they scrambled to find alternative places to invest.⁴

If regret aversion bias can occur among individual investors, it can, in turn, impact the broader investment decision-making processes that occur in the financial market. Investors may make incorrect investment decisions, such as buying a stock because they don’t want to regret missing out on the opportunity or selling a stock prematurely because they don’t want to regret having committed to holding. These decisions can, in turn, affect the price of a stock and lead to a self-perpetuating pattern of investment behavior. Overbidding in auctions, for example, is a result of bidders considering regret in addition to profit and driving the price up, which has been attributed to regret aversion.⁵

Personal responsibility is central to regret aversion as, by definition, one can’t regret a decision that they have no control over. Therefore, the bias predominantly occurs in people considering their own decisions, with collective effects emerging only when those individual sentiments create an aggregated outcome, such as in the case of financial markets.

Support for the emotional component of regret aversion can be found in neuroscientific studies, which suggest that anticipated regret’s powerful influence on future decisions is a function of our emotional pathways in the brain. One study associated regret aversion with increased activity in the orbitofrontal cortex and the amygdala,⁶ a connection that is believed to be highly involved in emotional processing.⁷

 Moreover, as Daniel Kahneman and Amos Tversky’s renowned prospect theory states,⁸ people are more sensitive to negative than positive events. With regret manifesting in negative emotion, we learn over time that this is an aversive outcome and seek to eschew the possibility. As with many cognitive biases, our preferences are derived from how we feel about a prospect rather than what we think about it.

Regret aversion is likely to be even stronger in decisions with significant consequences, such as health and financial decisions. While we may factor in regret when choosing between menu items at a restaurant, this regret will likely not loom as much as the potential regret of choosing the wrong house, for example. This makes regret aversion a non-trivial bias, as it can impact high-stake decisions.

Aside from its influence, the ability of the bias to help or hinder depends on the context. As previously mentioned, regret aversion can increase positive health-related behaviors,9 but also result in irrational decision-making in investing.¹⁰

Regret aversion is also believed to be a mechanism that we use to avoid cognitive dissonance. A theory developed by American psychologist Leon Festinger in 1957, cognitive dissonance refers to the way in which individuals strive to avoid the discomfort that arises when there are inconsistencies between their decisions and the outcomes. By trying to predict how we’ll feel about the future outcomes of our current decisions, regret aversion may help us to avoid potential cognitive dissonance. 

Regret aversion is likely to be even stronger in decisions with significant consequences. While we may factor in regret when choosing between menu items at a restaurant, this regret will likely not loom as much as the potential regret over choosing the wrong house. This makes regret aversion a non-trivial bias, as it can impact high stakes decisions.

Aside from its influence, the ability of the bias to help or hinder depends on the context. As previously mentioned, regret aversion can increase positive health-related behaviors,⁷ but also result in irrational decision-making in investing.

You may think that the founder of Amazon, Jeff Bezos, is the last person to be concerned about regret. However, regret aversion was actually one of the reasons Bezos took a leap of faith and founded one of the world’s most successful companies. 

During an interview in 2001, Bezos recalled the time when he was considering leaving his stable banking job, with a generous annual bonus, to launch a new company selling books online.¹¹ He discussed the idea with his boss, who, while being supportive of his new venture, convinced Bezos to think about it for 48 hours before making a firm decision. To help with this process, Bezos came up with his own Regret Minimization Framework in which he projected himself forward to age 80 and imagined what it would be like to reflect on his life. Using this framework, Bezos concluded that he would not regret participating in this new thing called the internet (yes, it was that long ago) and that even if he failed, he wouldn’t have regrets. The one thing he did think his 80-year-old self would regret, however, was not having ever given it a go. This possibility of regret is why we can now have almost anything delivered straight to our front doors. 

On the flip side, counter to Bezos’ framework, research conducted by Daniel Gilbert et al. found that people often overestimate future regret,¹² suggesting that individuals are less susceptible to regret than they may believe. The meta-analysis examined four existing studies measuring people’s anticipations and experiences of regret and self-blame. In the first study, students overestimated how much more regret they would experience when they “nearly won” a contest compared to when they “clearly lost.” The other three studies showed that subway riders similarly overestimated how much more regret and self-blame they would feel if they “nearly caught” their trains than if they “clearly missed” them. This is an interesting finding to remember when considering a decision where potential regret influences our preferences. By noting that we’re probably overestimating our future feelings of regret, we can avoid buying ‘emotional insurance’ that we actually don’t need. 

It can also help to take a more Buddhist approach in trying to avoid regret altogether, not by adjusting decisions, but by accepting outcomes. Whatever happened in the past is out of our scope in terms of impact. We can’t reverse our decisions of yesteryear but we can adjust our perspective towards them and seek to minimize the discomfort of regret.

By understanding regret aversion, we can help ourselves make more logical decisions that are founded in our current needs and preferences and not influenced by our future projections. 

Regret aversion originates from the fields of behavioral economics and psychology as a way of understanding how individuals deviate from traditional models of rational choice, particularly under conditions of uncertainty. During the 1940s and 50s, mathematician John von Neumann and economist Oskar Morgenstern developed the standard economic framework known as Expected Utility Theory (an example of classical decision theory), which assumes that individuals make decisions under uncertainty in order to maximize their utility. This groundbreaking mathematical theory, which was used to analyze the strategic interactions among rational decision-makers, was fully elaborated upon in their 1944 book Theory of Games and Economic Behavior.¹³ 

However, in the early ‘80s, several studies emerged suggesting regret's role in traditional economic theory. In 1982, for example, Graham Loomes and Robert Sugden published Regret Theory: an Alternative Theory of Rational Choice under Uncertainty.¹⁴ They noted how the “basic axioms” (statements that are regarded as being established, accepted, or self-evidently true) that underlie classic economic models, such as expected utility theory, don’t always align with human behavior. Their work, for example, highlighted how individuals often deviate from the predictions of classical economic models because they factor emotions, particularly regret and rejoicing, into their choices.

Companies often leverage regret aversion to push consumers into buying items that they may not otherwise have bought. A common sight in clothes stores nowadays is a rack of clothes with a sign stating ‘Last Chance’: these two seemingly innocuous words are designed to make passing shoppers stop and think, ‘if I don’t buy it now, I might regret it later when it’s no longer there.’ 

Companies can also frame the description of products using low-price gimmicks so that consumers focus entirely on the low price of goods and forget to actively consider and evaluate product information. This can lead consumers to buy a product simply because of its low price and the fear of missing out on a good deal (read more about FOMO below) when, in fact, they may have preferred a more expensive product that better met their original needs. 

Regret aversion can have an impact on online shopping behaviors, particularly impulse buying, which is far easier to do when armed with a mobile device and a credit card. A study conducted by Bin Li et al. examined the role of product involvement (how much engagement and interest the consumer has with an item) and anticipated regret in impulse buying behaviors in consumers.¹⁵ The researchers recruited 188 students from a university in Wuhan City, China, and explored their online shopping behaviors through a simulated task.

Participants read about a college student planning to buy a portable hard drive for their university studies but encountering a discounted unplanned product they had desired for a long time (camera or laptop). In the high-involvement condition, the unplanned product was a laptop; in the low-involvement condition, it was a camera. Participants imagined experiencing either upward regret (buying and later finding a lower price) or downward regret (not buying and later finding the product at its original price). They were then asked to reflect on their regret and indicate their likelihood of impulsive online buying. The researchers found that shoppers who experienced downward anticipated regret were more likely to engage in online impulsive buying. In contrast, the participants who experienced upward anticipated regret demonstrated less impulsive behavior.

Regret aversion and AI intersect in several interesting ways as AI systems become increasingly involved in decision-making processes where regret and avoidance often play a role. Regret minimization is a strategy used in machine learning to optimize decision-making by learning from past mistakes. The concept originates from reinforcement learning and game theory and is particularly relevant when an algorithm operates in uncertain environments. In AI terms, regret measures the gap between the outcome of the action taken by an algorithm (or agent) and the best possible outcome it could have taken in hindsight (regret = optimal reward - actual reward). Regret minimization aims to reduce this difference over time as the system learns, resulting in more effective decisions and outcomes.

 Let’s take the example of an AI system that manages customer recommendations for an online store. The AI algorithm suggests a pair of shoes to a user through a personalized email. After observing the user’s behavior (either to buy, not to buy, or to explore other items in the store), the AI calculates the following: if the user buys the shoes, no regret, but if the user doesn’t buy the shoes but purchases a different pair, the algorithm calculates regret for not suggesting the better option. The algorithm then reflects on these outcomes to minimize regret for future recommendations. 

Have you ever heard someone say they have bad FOMO? Sometimes, what they say is that they are highly susceptible to regret aversion. FOMO often occurs when people make a decision out of fear of missing out on the opportunity and the possibility of regret at a later date.

Consider a hypothetical scenario. It’s Friday night, and Sarah is quite comfortable staying in and watching a movie with some popcorn when one of her friends calls her and asks if she wants to go to a party. Although Sarah is quite tired and perfectly content staying in, the fear of missing out looms large as she doesn’t want to regret not going to the party. What if it’s a great party? This anticipated regret drives Sarah to put the popcorn back in the cupboard and get ready.

In the retail world, regret aversion often combines with loss aversion to heighten the perceived value of a product or service and push individuals into making purchases. As American psychologist Joseph Michelli reminds us, once a customer is considering buying an item, retailers will do everything possible to make sure they actually buy it.¹⁶ One customer experience tactic often used relates to loss aversion; once they notice you taking interest in a product, sales assistants will quickly help you find the size you need and usher you towards the changing room. When you have the item on, it’s easy to start imagining where you’ll wear it and what other items in your wardrobe you’ll pair it with. With this image in your mind, walking away from the item feels like a loss because you’ve already imagined your life with it. To avoid this feeling of loss and the regret you’ll experience if you don’t buy it, you find yourself at the cash register with your wallet out. Similarly, airlines often tell you that there are ‘only 2 seats left’ to induce panic in a buyer and fear that they will literally lose their seat if they don’t act in the moment. As consumers, it’s impossible to know if this is true or just a ploy to seal the deal. 

The consequences of regret aversion have been studied extensively in situations where people make decisions related to insurance, auctions, and lotteries. Unlike risky decisions in the financial market, these decisions are relatively low risk but can potentially cause unwanted emotional responses. 

Prize winners for the Dutch Postcode lottery, the largest charity lottery in the Netherlands, are the individuals who bought a ticket and reside under the postal code drawn. This means that people who didn’t buy a ticket are made aware of whether or not they would have won after the postal code has been drawn. Despite playing the lottery being an “irrational” behavior, it is believed that anticipated regret drives many of the decisions to buy one of these Dutch lottery tickets, as people are averse to the prospect of having their postal code drawn and going away empty-handed.

Researchers at the University of Tilburg in The Netherlands looked at four studies in which the influence of regret aversion was examined in the Postcode Lottery and the country’s other main lottery, the National State Lottery.¹⁷ Unlike the Postcode Lottery, the National State Lottery is a traditional lottery in which individuals buy a ticket with a number printed on it. Therefore, if a person doesn’t participate, they can never know if their number would have been drawn or not. The study found that the feedback given in the Postcode Lottery, but which is absent in the National State Lottery, influences the level of anticipated post-decisional regret and moderates the influence that anticipated regret has on people’s decision to take part in the lottery. In particular, one of the studies found that people anticipate more regret over not playing the Postcode Lottery when there is feedback about the neighbors winning a prize than compared to the National State Lottery. Interestingly, feelings of envy and jealousy didn’t differ between the two lotteries.

What it is

Regret aversion is when the anticipation of regret is factored into a decision, leading us to a preference that minimizes potential regret. Fear of regret can play a significant role in either motivating a person to take action or dissuading them from making a decision.

Why it happens

Regret manifests in the emotional circuitry of the brain, which is relied upon in gauging one’s preferences during decision-making. Since losses loom larger than gains, we seek to reduce the likelihood of incurring the negative experience of regret.

Example 1 - Fear of missing out (FOMO)

Sometimes people choose to go to that party not necessarily because it seems like fun, but because by not going, the possibility of regretting not going may weigh on one’s conscious.

Example 2 - The Dutch Postcode lottery

A lottery where people who didn’t participate are made aware of whether they would’ve won garners more interest as people don’t want to be put in the situation where they’re left regretting not buying a lottery ticket after their postal code was drawn.

How to avoid it

The consequences of regret aversion can be both positive and negative. Acknowledging that we overestimate the likelihood of regret can help curb runaway regret aversion. Additionally, accepting outcomes as they are rather than dwelling in regret can make some prospects less aversive in the future.By understanding regret aversion, we can help ourselves make more informed decisions and avoid its negative effects

What Can George Costanza Teach us About Making Better Investment Choices?

This article summarizes how the disposition effect, a phenomenon within behavioral finance closely linked to regret aversion, plays a role in financial decision-making.

Increasing the Pull of the Future Self

This article provides a nice caveat to regret aversion, as it highlights the many ways we fail to account for what our future selves might prefer.