Regret theory is a concept that claims that investors will experience regret if they make a wrong decision and thus will take this anticipated regret into account when making investment decisions.
Regret theory can negatively affect an investor's rational behaviour and reduce their ability to make profitable decisions.
It can change an investor's risk profile, causing them to be more cautious about risk or more risk-seeking than usual.
📍Example of regret theory:
Risk taking driven by FOMO
Let's take an investor who prefers to invest only in low-risk assets and observes the excitement around a recently launched token as an example.
This investor sees everyone around him investing in that token and decides to invest in it himself, ignoring the potential risks to avoid regrets about not buying it if it goes up even more.
📍Another example:
Being more risk averse
Despite all the reserch, an investor bought an asset which brought him losses.
To avoid this in the future, the investor begins to be overly cautious and spends an abnormal amount of time considering each investment decision.
Investors can minimise the effects of the regret theory in their investment decisions by following their own investment strategy.
When making investment decisions, it is necessary to weed out news that may be biased or subjective.
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