Important Notes:
- Regret Avoidance is the theory that looks at the behavior of investors in securities, a poorly performing currency.
- There is a tendency that investors rather than logical decision, when the assets are invested where they started to fall, take emotional decisions.
- Investors may stick to the poor security plan or pay even more money to it, in the hope that somehow recover the money and grow.
- This behavior indicates the desire to avoid the regret of investing.
- The end result is often that the investor loses more of its loss if it had reduced its loss earlier at the time.
Understand the avoidance of regret:
Regret avoidance is when a person wastes time, energy, or money to avoid feeling remorse for an initial decision. The resources spent to ensure that the initial investment is not wasted can exceed the value of that investment.
Avoid Behavioral Finances and Remorse:
Behavioral finance is the reason why people make irrational financial decisions? Regret Avoidance is an example of irrational behavior. Money is invested or spent based on emotions rather than a rational decision-making process. Investors who exhibit this type of behavior consider the cost of money they spent in the past to be much higher than the money spent in the future to recover previous capital.
Avoid Regret Avoidance Behavior
Having a basic understanding of behavioral finance, developing a strong portfolio plan, and understanding risk tolerance and its causes can limit the likelihood of performing destructive behaviors to prevent remorse.
Source: Investopedia