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Regret

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Regret is an extremely strong motivator to a decision-maker.  Regret is a decision-making factor that all decision-makers want to avoid.  Regret occurs when the outcome of a decision does not deliver the desired results.   The greater the potential for loss (or shortfall in expected result) the greater the regret.  Regret can occur under two different circumstances: when 1) there is a chance for gain but the option was not pursued and 2) there is a chance of loss and the option was taken.  These two circumstances are shown in Figures 4 and 5 and discussed below.  

In most circumstances, the decision maker is motivated by seeking the prospect or chance of gain as shown in Figure 4.  The decision-maker either chooses to accept or reject the decision choice.  There are two ways the outcome brings satisfaction to the decision-maker.  One, the decision-maker is satisfied with the decision if they accepted the choice and the outcome was good (Quadrant I - the outcome justified the investment).  Two, the decision maker is satisfied with the decision if they didn't accept the choice, and the outcome turned out badly (Quadrant IV - outcome did not justified the investment).  On the other hand, there are two ways the same decision can result in regret for the decision-maker.   One, the decision-maker regrets the decision if they accepted the choice, and the outcome turns out badly (Quadrant II - the outcome did not justify the investment).  Two, the decision-maker regrets the decision if they reject the choice, and the outcome turns out good (Quadrant III - loss of opportunity of gain).

In some circumstances, the decision maker is motivated not by seeking gain but by avoiding the prospects or chance of perils or losses as shown in Figure 5.  The decision-maker either chooses to accept or reject the decision choice of taking protective measures (which have a cost such as insurance).  There is an inherent reluctance for spending additional resources just to maintain the status quo or to keep things operating as they have been.   The expenditure of resources to avoid risks has a certain cost but the effectiveness of the risk avoidance is conditional on uncertain future.   The perils of highway accidents, home fires, illness, debilitation, early death, etc are some clear examples of this type of perils that most people protect themselves against with insurance.  The thing we fear may or may not happen, but the cost of insurance is certain.   If we don't protect ourselves and risk occurs, the financial consequences could be expensive.  In many decision, the downside risks are not so catastrophic so there is an incentive for the decision-maker to take a chance and not to accept the extra cost of protection.   

To protect against the chance of loss, the decision maker is not motivated by gain, but instead, the motivation is to avoid a peril or loss.  There is an identified risk wherein pre-emptive action can be taken to reduce or avoid its most serious consequences.  There is a probability that the peril will not happen.  The issue is whether or not the decision-maker wants to take a chance or to take risk avoidance actions.  A good example is the weather.  It might rain, and you have three blocks to get to the office.  You have two choices:  to take or not to take an umbrella.    The two possible outcomes are rain or no rain (there are actually more possible outcomes such as light rain, heavy rain, torrential rain, etc.).  In this circumstance, there is no prospect of gain, but there is a prospect of loss.  There are two ways the outcome brings satisfaction to the decision maker.  One, the decision-maker is satisfied with the decision if they accept the choice to take preventative measures (bring the umbrella), and the outcome turns out badly (it rains).  The decision-maker avoids the peril (getting wet, cold, and feeling miserable while at work as in Quadrant III).  Second, the decision-maker is satisfied with the decision, it they rejects the preventative measure (carrying the umbrella) and the outcome is good (no rain).  The decision-maker took a gamble, and this time it paid off as in Quadrant II (they didn't have to carry the umbrella to and from work).    

As seen in Figures 4 and 5,  there are two actions that the decision-maker can make that could lead to regret: commission (accept the choice and make the investment) and omission (reject the choice and do nothing).  Whether the action leads to satisfaction or regret depends on the circumstance.  Consider the case where the decision-maker is seeking a gain.  If they accept the investment, and the investment performs poorly (Quadrant III), then the regret is one of commission (they took an action but shouldn't have).  If they reject the investment, and the investment turns out good (Quadrant II), then the regret is one of omission (they should have taken some action but didn't).   The situation is exactly reversed in Figure 5 where the decision-maker's motive is avoiding loss (risk or peril).   Notice that the quadrants of regret are flipped (or the reverse of each other).  In Figure 4, the motive is gain, and in Figure 5,  the motive is avoidance of peril.  


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Website last updated on 10/19/08
Copyright 2005 Charles W. Sooter.  All rights reserved.