Radio Stations and Regret Aversion

Scenario 1

Let’s say you call into a radio station to request your favorite song. When you originally made the call you weren’t aware that the radio station was actually having a contest. If you are the 100th caller in the contest then you win $100. It’s that easy! On this lucky day, you are the 100th caller. You call, receive $100 for you minimal effort and you go on with your day. How sweet is that?

Scenario 2

Let’s say you call into the same radio station to request your favorite song. When you originally made the call you weren’t aware that the radio station was actually having a contest. If you are the 10,000th caller in the contest then you win $10,000. It’s that easy! Now on this day, you are the 999th caller. Since you were so close to the grand prize, you receive a consolation prize of $150. Not bad right?

  • Facebook
  • Twitter
  • Google+

If I gave you the choice between the two scenarios above, which would you prefer?

If you’re a logical thinker – the ultimate decision would be: do I want $100 or do I want $150?

It seems pretty simple, but it’s not.

In a 1980 paper published in the Journal of Economic Behavior and Organization, Richard Thaler experimented with a similar scenario. Amazingly, a lot of people would actually choose Scenario 1 over Scenario 2. In other words, they would choose to win $100 over winning $150. The reason is “regret aversion.”

The people that preferred Scenario 2 would feel so bad about just missing the grand prize that they would essentially pay $50 to not face that feeling of regret.

What is Regret Aversion?

The idea that most people make decisions in a way to avoid the pain of regret and the responsibility for negative outcomes.

Unfortunately, regret aversion most often leads to inaction.

 “For of all sad words of tongue or pen, the saddest are these: “It might have been!” – John Greenleaf Whittier

Think about everything you regret to this point in your life and answer this question truthfully?

What do you regret more?

– Things you did, that you shouldn’t have done

– Things you didn’t do

Most people’s biggest regrets in life center around things they haven’t done – and wished they did. “I should’ve spent more time with this person.” “I should’ve said something sooner.” “I should’ve taken that more seriously.”

People experience more regret over what they did in the short term, while regrets of inaction hurt more in the long term.

Thanks for the psychology lesson, A. Blinkin! Now how does this affect me and my money?

Well to start, it cost you $50 in the original example of this article! More generally – using terms familiar to finance – regret aversion is to blame for cash sitting in a bank account earning nothing when it could be earning higher returns; failing to sell an investment only to see it drop in price; delaying a purchase only to watch the price go up; continuing to pay interest on high-rate credit cards instead of actively searching for cheaper alternatives. Each of these instances would be better by taking action. Instead most of us sit around wondering what could happen instead of using the information we know. We’re so afraid of changing what we’re used to (status quo bias) or taking a chance (regret aversion) to do anything.

Twenty years from now you will be more disappointed by the things you didn’t do than by the ones you did do.” – Mark Twain

What sort of things do you regret?

20
Leave a Reply

10 Comment threads
10 Thread replies
0 Followers
 
Most reacted comment
Hottest comment thread
12 Comment authors
  Subscribe  
newest oldest most voted
Notify of

I could say that I am like Piaf and regret nothing. But…I am one of the people who regret things they have done. This is a choice I made sometime ago but also a core part of my natural approach to life. I look at something and think: ‘It can’t be that hard!’ By the time I realise how hard it really is it is usually too late to give up. This is how I run marathons.

Haha, do you regret the marathons?

I definitely do things first and think about it later. This often doesn’t work well with assembling items. Darn instructions have to be used occasionally.

This is a good trait. When in doubt, do something. Anything…

Interesting. Regret aversion certainly accounts for a lot of the inaction I have seen in myself (relating to investments I didn’t make) and in others.

I regret not being able to see the other side of the picture you included in this post! I admit though, it is what made me stay and read the entire post. Interesting stuff!

That was the whole point! You gotta spice things up once in awhile if you’re a PF site right?

Regret aversion sounds an awefully lot like inertia!

I regret not starting an online business in college. But I try not to focus on regrets – it’s good to learn from them, but better to move on and learn to take risks so that you can live with fewer regrets.

I’m about a 50/50 split on regrets, half for things I’ve done and the other half for the things I didn’t do. Nothing I can do about it now, just learn to make better choices. :-)

Not yet; no one know how I am going to feel about this one in 30 years time. In the UK an article on the five top regrets of dying people was making the rounds this week. Top one: worked too much! Next one: didn’t have enough fun!

Great article! I think Frank said it best:

Regrets, I’ve had a few,
But then again, too few to mention

It can take a while to get over them, but in the end they are lessons ;)

I bet that result doesn’t change going forward. I hope to be able to say I didn’t work too much. In fact, that’s not a bad for goal for life when you really think about it. Saving my income when young will hopefully allow me to escape that fate.

Now that is a great quotes sir! Thanks for stopping by!

My girlfriend once put in some money into a slot machine at the casino. I told her to do a max. bet since the jackpot only worked if you did. She didn’t listen to me… she hit the jackpot of $10,000… but walked away with nothing cause it was disabled. Oh, the regret!

Most of my regrets come from college. Surprisingly around things I didn’t do. Creating anything (website included) is so easy to do while in school. There is so much free support to go around.

I actually sang this Sinatra song in a college karaoke contest. One thing I definitely don’t regret (or remember)!

WOW! That is some insane regret. That’s why I don’t go near slots!

That is crazy – and SO true. My husband came in second in his fantasy football league this year – he won $50, but missed out on the $500 grand prize because Drew Brees had one bad game. My husband wasn’t happy he’d quintupled his initial investment (the $10 buy-in) – instead, he was furious he’d just missed out on the big bucks!

Ah, there is a special place in my heart for fantasy football regret. That belongs in its own category all together.

Share This