It’s been a year of lingering regrets: regret at not shorting the pre-pandemic February highs, regret for buying too soon as the market crashed, regret for buying too little around the April lows, and now the regret of selling too early as stocks keep advancing.
To invest, it seems, is to accumulate at least some regrets.
Regret involves two distinct types of emotions, what psychologist Daniel Kahneman calls “hot” and “wistful.”
Hot regret, as the name implies, is the more intense of the two, evoked by the experience of an outright loss. Think back to March if you suffered a drawdown; consider the quick anger or burning pain you felt after realizing your mistake. “This is when you want to kick yourself, and it is associated with a short-term perspective,” Kahneman explains. It arouses thoughts of How could I have been so stupid? or What a disaster!
Wistful regret, in contrast, is typically evoked by thoughts of forgone gains. It is less intense as it mainly implicates our inactions, something we shoulda done but didn’t, like buying silver in June.
The regret is not just: “I should have bought silver.” It leaps further into what might have been: “I coulda been up 70 percent.” This longer-range perspective often leads to a feeling of despair, such as our returns woulda been better if only we’d taken action.
Bear markets evoke hot regret whereas wistful regret may figure more prominently in bull markets.
In a bull market, regret persists. There is always an opportunity for positive action; each day another chance to get in. Undoing a failure to act when prices were lower is hard, however, and the wistful regret becomes more and more pronounced as stocks move higher.
Regret is fundamentally a counterfactual emotion, arising from the contrast between what has actually happened and an easily imagined alternative that might have happened. What follows is unproductive rumination and self-blame that impedes corrective action.
What we need is to forgive ourselves and accept the past so we can once again be present. Consider the circumstances that made good choices difficult. Maybe you had limited knowledge or had to make a quick decision under time pressure. Be kind to yourself in the same way you’d comfort a fellow investor.
Regret is just an internal trigger telling us to take another look at our decisions. It can be a helpful emotion—not just a painful one.
“Regret is like a flag going up,” says Neal Roese, a professor of marketing at Northwestern University. He studied the outcomes of negative emotions on decision-making and found that harnessing regret can be beneficial to put past events into context and positively influence future behavior.
Regret scored the highest of all negative emotions (anger, anxiety, boredom, disappointment, fear, guilt, jealousy and sadness) when it came to successfully (1) making sense of the world, (2) avoiding future negative behaviors, (3) gaining insight, (4) achieving social harmony, and (5) improving our ability to pursue desired opportunities (presumably because we regret past passivity).
Our most enduring regrets stem from our failure to live up to our ideal self. This is a common lament in investing. But as personal development legend Jim Rohn put it, “We must all suffer one of two things: the pain of discipline or the pain of regret or disappointment.”
Which will it be?