loss aversion Vs regret...???

I am not able to understand the difference between the two ??? If I sell most of the investments in my portfolio at a profit then is it Loss aversion or regret ?? schweser says regret … but I think loss aversion is also equally true… Can anyone please tell me the differentiating line …?? Thank you

If you sell it at a profit, I would say its neither. The way it can be explained via regret, if you sell it at a proft, but the stock will continue to go higher, so you may experience a regret because of selling it to early and missing even more gains. However, such feeling of a regret won’t be strong, since you didn’t experience a loss. Regret is really felt, when you made a mistake, and there is nothing you can do about it (i.e. making bad investment decision and getting punished for it by losing money). Regret is painfull because first of all, the outcome of the event is bad, but what hurts more is felling responsible for your mistakes, stupidity, etc. Loss aversion is the desire not to experience feeling of a loss (i.e., not getting out of a losing trade in hopes that it will come back).

agree with volkov actually, there is a good word in the cfa text associated with loss aversion: “get-even-itis” which exactly fits into your last sentence: “not getting out of a losing trade in hopes that it will come back” anyway: I think schweser does a good job with the theory of behav.finance, but when then you look at their examples - questions, they are quite confusing and several times subject to interpretation

loss aversion is exhibited only when the value of the investment has gone below its cost of acquisition and u don’t want to book the losses. regret is exhibited both when the value of the investment has gone below its cost of acquisition and u r still holding it AND when u have sold the investment n then the price zooms up…

holding on to losers for too long is what ? regret or loss aversion… schweser says its regret … but I think it can be loss aversion as well…

CFAI also talks about regret minimization (Actually i think that is what regret is), so regret minimzation can cause extreme risk aversion… again, i need to confirm it. Not selling losers i guess can be both but it depends what are the justification for not selling

if you don´t sell because you want to get even = loss aversion if you don´t sell because you would feel guilty for being a loser = regret does it make sense?

Clear as mud…

my thoughts exactly…

Unless on the exam, they use those specific wording…I am F***ed.

My understanding was that loss aversion was the unwillingness to get out of a losing proposition because it would involve recognizing a loss. I thought (but am less sure about) that regret is when you don’t want to invest in an asset because you were burned last time somehow (lost, or sold too soon), and associate that error with the asset. You therefore aren’t willing to reinvest in it even when it might be appropriate.

manjunath.gaddi Wrote: ------------------------------------------------------- > loss aversion is exhibited only when the value of > the investment has gone below its cost of > acquisition and u don’t want to book the losses. > > regret is exhibited both when the value of the > investment has gone below its cost of acquisition > and u r still holding it AND when u have sold the > investment n then the price zooms up… Also remember that if your cost (buy price) is your reference, this would constitute Anchoring.

The principle of loss aversion states that investors prefer the prospect of larger, uncertain losses to smaller certain losses and may engage in risk seeking behavior in an attempt to recover from their losing position. You can think of this as a gambler who keeps rolling the dice in order to break even. An investor may exhibit fear of regret by holding a winning position too long. In order to avoid selling the investment and possibly seeing it appreciate, the investor will choose not to sell and instead will collect the cash flow or dividends of the investment (if applicable). This can result in poor diversification in a portfolio context as the investment now represents a substantially larger allocation than would be desired in a well diversified portfolio. The investor should reallocate the position with a focus on tax deferral or tax minimization.

Yeah, I seem to remember that “regret” was used more in a “fear of regret” context. You don’t take a decision because you fear you will regret it. Does that sound right to you guys? Boy this discussion is getting me all re-confused. :frowning:

you and me both…i’ll reread the section again right before the exam…

I think …regret is a part of loss aversion… Only difference is … “Loss aversion would lead to risk seeking behaviour …but regret will lead to more risk averse behaviour by avoiding certain types of asset classes…” But I still dont know how to answer the questions where both the options are involved…

I would say that Loss Aversion is when a person has a losing stock and doesn’t want to sell it until they have recouped their cost “get-evenitis”. Regret on the other hand I believe has to deal with not wanting to sell a stock b/c you’re afraid it will still go up in value but is not currently at a loss. They are both very similar but I’ll say maybe Loss Aversion is when stock is below cost and Regret is when stock is above cost…

^So. Loss aversion===>not selling loser, regret===>not selling winner??

Stalla says this, “Loss Aversion causes investors to often have a difficult time selling a security which has lost value.” Regret – “Not making the right decision leads to regret. Regret is not simply the pain of loss; it is the pain from being responsible for a loss. Investors that caused their own losses feel the loss more strongly than if the losses were caused by someone else…” Now I guess I can ignore what I said earlier, so I’m back to “confused”.

WS…that might be a safe bet…