Was it the coin that flipped, or you?

 I am offering you the following two options, pick one.
Choose either
a)     A 50% chance of winning ten lakhs of rupees, or
b)     One lakh fifty thousand rupees, cash down for you (i.e., it is a certainty).
 
(well, you have a third choice, which is to tell me to fly a kite, while you chill and refuse to play this.  But, heck, you have nothing to lose, no upfront fee.)
 
Have you chosen?
The 50% option?
Or the cert of 1.5 lakhs?
 
Do play along with me for a minute. 
Assume that you chose the 50% option.
I flip the coin and you call heads or tails.  You lose.  Get nothing.
 
Or assume that you chose the cert of cash in your pocket (1.5 lakhs).  I still flip the coin, while you call heads or tails – this is of academic interest now, for if you win, you will get nothing. 
You win.  You have just let go of 10 lakhs. 
 

What you will experience (now, don't deny it!) is regret at having chosen wrongly, despite much of this being outside our control.  Here is what we know: regret is that sinking feeling......., accompanied by more feelings (as if, the sinking one wasn't enough, grrrr) -

a) one should have known better

b) I am seriously dumb (kick, kick)

c) I must correct this (which often leads to more regret!)

d) I should have done something else 

There's no place like the financial markets to experience regret aversion.  Here is an example!

The hindsight bias is a close cousin of regret and is best defined by Investopedia:

Hindsight bias is a psychological phenomenon that allows people to convince themselves after an event that they accurately predicted it before it happened. This can lead people to conclude that they can accurately predict other events. Hindsight bias is studied in behavioural economics because it is a common failing of individual investors.

So, is there anything we can do about it?

Well, it is a palliative approach really, one that eases the pain, because regret is painful.  The best thing we can do,  Dan Kanhemann, the Boss (and the author of Thinking Fast and Slow), tells us, is to anticipate it, to expect us to feel that way later.     What does this mean?

 

For example: decisions that depart from what could be called the default choice produce the most regret.  People expect to feel more regret when an outcome is produced by action than when the very same outcome is produced by inaction.  So, if it is your standard practice to put all your savings in fixed deposits, but you chose, last year, to invest in a debt scheme of a mutual fund that is now down – way, way down – you will kick yourself harder (never mind if the fund is expected to bounce back in future). 

Lesson:  if you are going to deviate from the default choice in taking a decision, expect higher regret and therefore do more homework, with possibly a longer time period in mind.  Sometimes, it makes sense to ignore the immediate noise that triggers regret. 

Kahneman suggests that you can also take measures that will protect you against regret.  If you remember when things go badly that you considered the possibility of regret carefully before deciding, you may experience less of it.  His personal strategy to avoid regret coming together with hindsight (that is another bias!) is to either be

a)      thorough or

b)      completely casual, when making a decision with consequences.

That way you will not look back and say “I almost made a better choice.”