Regret aversion can hinder portfolio management from "summary" of Your Money and Your Brain by Jason Zweig
Regret aversion is a common emotional bias that can have a significant impact on the way people manage their investment portfolios. When investors are haunted by the fear of regretting their decisions, they often become paralyzed and unable to make necessary changes to their investments. This fear of making the wrong decision can lead to inaction, even when it is clear that adjustments need to be made. The fear of regret can also cause investors to hold on to losing investments for longer than they should. They may convince themselves that the investment will turn around eventually, rather than accepting the loss and moving on to better opportunities. This reluctance to cut their losses can result in a portfolio that is weighed down by underperforming assets, ultimately hindering overall returns. Furthermore, regret aversion can lead investors to chase past performance, even if it is not sustainable in the long run. They may be afraid of missing out on potential gains and therefore allocate more of their portfolio to investments that have already performed well. This can expose them to unnecessary risk and leave their portfolio vulnerable to sudden downturns.- Regret aversion can cloud investors' judgment and prevent them from making rational decisions about their portfolios. It can lead to suboptimal choices, missed opportunities, and ultimately lower returns. Overcoming this emotional bias is crucial for effective portfolio management, as it allows investors to make decisions based on logic and analysis rather than fear and regret.
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