Wednesday, February 27, 2013

Money and Regret, "If Only I Had…"


In my role as a financial advisor, I see a lot of people paralyzed by financial choices. I am fascinated by how people make decisions. I’ve concluded that our financial decisions are influenced more by our emotions than most of us would like to admit. Today we’ll examine the ways in which regret, a most powerful emotion, affects decision-making.

Often there are too many choices and we know that when the decision becomes overwhelming, we tend to avoid it altogether. There are numerous reasons why people avoid decisions, but regret, while seldom explicitly acknowledged, plays a significant role. The mere thought of losing money triggers reactions in our brains that produce emotions like regret.

Choosing vs. Doing Nothing
We tend to feel more regret when we make a poor choice that results in a loss than we do if we failed to take an action. In this situation, a sin of commission is worse than a sin of omission. For example, we finally decide to invest in a condo because everyone else seems to be making money, only to buy at the top of the market. This loss is more painful than the regret we feel having let the opportunity pass us by.

What We Should Have Done
Hindsight can also deliver a potent sting. How many times have you uttered the words “If only I had done . . .?” Though it seems obvious that “hindsight is 20/20,” it’s easy to forget all the factors that influenced our original decision. We end up berating ourselves for not anticipating the ideal outcome. What we “should” have done seems so clear!

Things We Didn't Do
Jason Sweig in his book, Your Money and Your Brain, calls this counterfactual thinking. The more you indulge in this type of thinking, the more regret you will feel. Sweig also concludes that over time we end up seeing all the better choices we should have made, and over the long run we can experience more regret over things we didn’t do. I once asked a client if he’d had any regrets in his life. He responded by saying he wished he hadn’t been so cautious. He regretted never having “reached for the brass ring.”

What does all of this suggest? Regret is a strong emotion that can interfere with our decision-making, particularly with decisions about our money. Two suggestions: one of the best ways to become unstuck is to have a conversation about the issue with someone you trust. Getting an issue out into the open defuses its power! Second, planning is a process that helps us to think strategically about the future and promotes taking action consistent with what we want to achieve. It reduces the regret over things we didn’t do, because planning involves making conscious choices. You won’t regret never having played the piano, if you never aspired to in the first place…

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