How to Use Economic Regret Theory to Achieve Happiness

How to Use Economic Regret Theory to Achieve Happiness

My most painful regrets have led to my two greatest joys: My writing career and my children. If I had not committed the endless blunders I did as a boy, the circuitous path that life sent me on would never have led to my current destination. 

In 1982, economists Graham Loomes and Richard Sugden rocked the economic world with a paper in The Economic Journal detailing a new theory called Regret Theory. 

Up to then, the prevailing economic theory, which had persisted since the 18th century, was that humans were completely rational beings, capable of entirely analytical decisions when faced with a set of obvious statistical data. This perfect human even had a name: Homo economicus. 

The problem was that the theory didn’t match reality. People didn’t invest rationally every time. 

Regret Theory changed that perception. The theory purported that human decisions are weighted by the gains or losses previously experienced. If you bet on a horse race and lose, that regret will strongly affect your future decision to bet on horse racing, even if you’re shown incontrovertible evidence that you cannot lose in the coming race. Similarly, a past experience of winning would color your future decisions. 

When I was young and reckless, I missed a ramp on the freeway, turned my vehicle abruptly to try to still catch the ramp, skidded on some gravel in the triangle of the road fork, and smashed hard into an embankment. The car toppled once on its side, then again head over heels, slamming top-down with a crunch. I hung upside down, held only by my seatbelt, the car swaying. The first thing I did was check if I could move my legs. The second thing I did was unbuckle my seatbelt and get the hell out of Dodge because I had seen too many Hollywood movies where cars explode. 

There was no explosion, but gas pumped heavily out of the vehicle’s cut gas line. I walked away without a scratch. The car was totaled. 

“Real” regret in my dictionary is the kind that cuts to the bone. It’s a powerful word, impressing upon us the great irreversibility of situations beyond our control. 

Prior to Regret Theory, economists simply ignored emotions and focused on homo economicus — that perfect analytical machine capable only of cold-blooded calculation. But Regret Theory tried to furnish some degree of predictability to emotion, and a way to overcome it. 

I’m not a behavioral economist, but I’ve come up with my own theory about this: When I think of my greatest regrets, my immediate emotional response is often a pang of sorrow. But when I further analyze them, comparing what I "paid" for what I received, my sorrow either lessens, or I come up with a solution to lessen it in the future. 

“Going long” in investing means you invest for the long-term, slowly building up your portfolio until, all combined, you are in a far better position than you were when you started. Long-strategy investors don’t sweat momentary downs, and they have diverse portfolios. They know single stocks can go up or down. The point is to look at the whole picture. 

In life, we call this “having a well-balanced life.”

Related: Work-Life Balance Is Simple. To Succeed at Work, Get a Life.

Now that I’m 40 years old (and slightly regretful of my lost youth), I tend to be more self-reflective. It is that self-reflection that led me to the following theory:

That crazy car accident I had in my early twenties? I don’t miss that car. These days, when I see that I missed a ramp, I just keep on driving because there could be gravel on that turn! And I don’t want my kids and wife going through an accident like the one that could’ve taken my life. 

I lost the car, but gained a lesson that keeps my family safe. Net gain. 

What about my age? I traded my youth because I expected to make good memories, have incredible experiences and achieve most of my goals. The memories could be better, the experiences are not enough, and many of those goals are still mostly unachieved. 

Net loss. But my kids and my writing career make up for it. Those were two stocks I hadn’t counted on in my portfolio. 

Life is full of trades, and regret is deepest when we pay more for something than we receive. 

So, what’s the solution? Expect the market of your life to rise. Go out and get the returns you need so you do achieve a net gain across your life’s portfolio. For some, that could mean more time with the family, a new job or just a barbecue every Saturday with friends to start racking up those good memories. For others, it might be writing a book, bungee jumping, skydiving or that round-trip around the world they’ve put off for so long. 

It’s about balance. Work, work, work, work all the time is like investing in only one stock. It’s too risky. It’s short-sighted. It can lead to regret.

By taking a step back from the cloudy emotion of regret and forcing ourselves to focus on the potential net gain of our life’s portfolio, we either see the bigger picture and immediately stop regretting so much, or we figure out a way to turn our losses into net gains.