STREET DOGS

From Ben Carlson at A Wealth of Common Sense:

One of the hardest parts of the decision-making process in most endeavours stems from the fact that you can’t simply run a simulation and create a decision tree to show how different decisions and variables would affect the outcomes of each and every big decision you make.

This leads to what psychologist David Bell calls decision regret. In terms of our finances, this occurs when we focus on what might have been if we would have made a different decision with our money. Bell did a study where he offered two choices for a lottery. One would pay out $10,000 if you won or nothing if you lost. The other would give you a certain gain of $4,000. The study found that those who chose to play and lost told themselves they were being too greedy while those who accepted the $4,000 wished they had never known about the potential to win $10,000.

Basically, there is always going to be something you can look back on with regret in regards to your money decisions. Sometimes you sell an investment that continues to rise. Other times you hold on and watch it come crashing down.

Then there are all of those investments you failed to make which saw crazy gains.

This same decision regret permeates investor minds in almost all market environments.

There are always what-ifs in the investing game because there’s no such thing as a perfect portfolio, optimised asset allocation, market equilibrium or best time to make purchases or sales. This second-guessing can really ramp up during market corrections (as they have been known to do of late) as what makes it so much worse for investors is the dreaded hindsight bias, where we start to play the I-knew-it-all-along game.