The difference between regret minimization and loss aversion

CFA Level III
#1

The difference between regret minimization and loss aversion? Regret minimization is the desire to avoid feeling the pain of making a poor financial decision Loss aversion refers to people’s tendency to strongly prefer avoiding losses to acquiring gains. By hanging to the poor performing stocks, the manager is avoiding any admission of an error. They always seldom to sell the poor performing stocks Any clear difference between them? Thanks

#2

regret minimization: stay away from making decisions, hire a consultant and blame him if things dont’ work out loss aversion: don’t sell a stock until it starts making money for you

#3

+1 for maratikus

#4

Loss aversion - reluctant to accept loss => may lead to risk seeking behavior Regret minimization (if only I had…) - hindsight on making a bad decision => stay in comfortable investments; live off of cash flow instead of sell stock

#5

To add, LA is one sided while regret can be two sided. You can either regret making a bad decision or regret not making a good decision. This can lead to future fear of regret and staying with comfortable investments.

#6

It seems that for investors with regret minimization, they don’t sell stocks no matter stocks perform well or poorly. If the stock perform well, they don’t want to lose the chance of upside potential, so they keep the stocks. If the stock perform poorly, they don’t want to admit the error of investment decision, so they hold the losers?

#7

But these do not answer the question. Suppose an investor has unrealized loss in a stock and he does want to sell. In this unique, and perhaps most relevant situation, is it LA or RM?

#8

monster: I think RM would have avoided an investor being in this losing stock to begin with, he would have been in F.I. , Cash, etc… LA they would hold on, wait out the loss and hoping it will come back, increasing portfolio risk… so I would say it is more LA… i think we’ll have some guidance concerning this on the exam…or both would be acceptable…

#9

maratikus Wrote: ------------------------------------------------------- > regret minimization: stay away from making > decisions, hire a consultant and blame him if > things dont’ work out Isn’t that more self-attribution bias? RM is more sort of inaction from my perspective. They just don’t do anything beause of fear that they screw up.

#10

I lean toward LA as well. But sometimes I give wrong answers following this argument. Really puzzled. 3rd & Long Wrote: ------------------------------------------------------- > monster: I think RM would have avoided an investor > being in this losing stock to begin with, he would > have been in F.I. , Cash, etc… > > LA they would hold on, wait out the loss and > hoping it will come back, increasing portfolio > risk… > > so I would say it is more LA… > > i think we’ll have some guidance concerning this > on the exam…or both would be acceptable…