Investor regret: The role of expectation in comparing what is to what might have been

Abstract

Investors, like any decision maker, feel regret when they compare the outcome of an investment with what the outcome would have been had they invested differently. We argue and show that this counterfactual comparison process is most likely to take place when the decision maker’s expectations are violated. Across five scenario experiments we found that decision makers were influenced only by forgone investment outcomes when the realized investment fell short of the expected result. However, when their investments exceeded prior expectations, the effect of foregone investment on regret disappeared. In addition, Experiment 4 found that individual differences in the need to maximize further moderated the effects of their expectations, such that maximizers always take into account the forgone investment. The final experiment found that when probed to make counterfactual comparisons, also investments that exceed expectations may lead to regret. Together these experiments reveal insights into the comparative processes leading to decision regret.

How am I doing financially compared to expectations? An experimental comparison of messaging strategies in investor newsletters

“…Finally, we contribute to the understanding of investors' past performance comparison by showing that accentuating past performance is useful in terms of positive past results but not significant in the case of negative past results. This confirms research that shows how past performance influences future investment decisions (Huang and Zeelenberg, 2012; Campbell et al. , 2013).…”

“…The intervention also had statistically significant results for investors whose investment was zero or negative for a year and without a significant investment in the month prior to the intervention. The message could influence the person to think what could have beenhad the person decided to invest; that leads to regret, as also Huang and Zeelenberg (2012) showed. As the message stated ".…”

“…The intervention also had statistically significant results for investors whose investment was zero or negative for a year and without a significant investment in the month prior to the intervention. The message could influence the person to think what could have been – had the person decided to invest; that leads to regret, as also Huang and Zeelenberg (2012) showed. As the message stated “ … if you invested 25 euros every month, you could increase your investment account to as much as 12,460 euros in 10 years … ” the recipient might feel regretful for not participating, having lost the potential gains.…”

“…For example, a positive experience with partaking in a successful Initial Public Offering (IPO) reinforce a positive attitude towards investing in upcoming IPOs, while a negative first experience will influence the investor to be negative towards upcoming IPOs (Kaustia and Kn€ upfer, 2008). Investors also compare their own results to those that could have been often leading to regret (Huang and Zeelenberg, 2012), while having a very successful past performer in their portfolio (i.e. a winner stock) explains future decisions made on the account (Campbell et al, 2013).…”

On the meaning and measurement of maximization

“…Social comparison may undermine maximizers' happiness because they rely on external criteria to make their decisions, rather than relying on more personally-relevant information (Iyengar et al, 2006;Parker et al, 2007). Furthermore, even if their choices produce better outcomes than expected, maximizers are still regretful when other people's choices turn out better than their own, whereas satisficers are happy with unexpectedly good choice outcomes regardless of the outcomes of other people's decisions (Huang & Zeelenberg, 2012). In other words, social comparison heightens maximizers' susceptibility to regret.…”