The Regret Theory

"Fear of Regret" or "Regret Theory" deals with the emotional reaction people experience after making what they think is an error of judgment.

Investors become emotionally affected by their original purchase price of a stock when they are going to sell it.

So, they avoid selling the stock in order to avoid the regret of having made a bad investment and the embarrassment of reporting a loss.

We ALL Hate to Be Wrong ...

Don't We?

What investors should really ask themselves when faced with a similar situation is:

"What are the consequences of repeating the same mistake and if this security was already liquid, would I invest in it again?"

Chances are that you would not!

Regret theory also holds true for investors who did not buy a stock they had previously considered and which subsequently went up in value. By following the conventional wisdom, some investors avoid the possibility of feeling regret by rationalizing their decision with:

Everyone Else Is Doing IT!

Although it does not make much sense, some feel it’s much less embarrassing when you lose money on a popular stock that half the world owns it.

On the flip side, losing on an unknown or unpopular stock is a little harder to swallow!

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