People Behave as if they Anticipate Regret Conditional on Experiencing a Bad Outcome

Decision-makers often must decide whether to invest in prospects to reduce risk or instead save scarce resources. Existing models of risky decision making assume that decision-makers consider the absolute improvement in probabilistic chances (e.g., increasing a 10% chance of winning $10 to a 20% chance is roughly similar to increasing an 80% chance of winning $10 to a 90% chance). We present evidence that people instead behave as if they consider the relative reduction in bad outcomes (increasing a 10% chance to a 20% chance eliminates 1/9th of all bad outcomes, while increasing an 80% chance to a 90% chance eliminates 1/2 of all bad outcomes). This bias in the anticipation of preventable bad outcomes drives risk preferences that violate normative standards and results in the same participants behaving both risk-seeking and risk-averse within the same decision-making task. We discuss how regret theory can be adjusted to accommodate these results.

Towards a Sociology of Regret

The paper looks into sociological implications of two discussions currently developing in behavioral economics and organizations theory: (1) regret theory, exploring the proposition that human decision making is governed by avoiding anticipated regret, rather than maximizing expected utility, and (2) studies of sunk cost fallacy, consisting in making decisions aimed at justifying previous decisions. We argue that these two areas of theorizing, presently isolated, are dealing with essentially the same phenomenon. This becomes evident if we recognize that choices are organized in sequences, with the merits of each particular choice being evaluated in the light of outcomes of the whole sequence. We then explore some general conditions of the ability to anticipate regret: interaction with one’s future Self and sequential organizations of states an individual find him/herself. We then discuss some widely spread forms of individual adaptations to the threat of experiencing regret: dissonance avoidance, prospective rationalization, cultivation of prescience, de-sequencing and open endings. We further explore various forms of collective actions involving regret avoidance, using the development of the sociological discipline as an example.

Anticipated Regret

Regret is the prototypical decision related emotion. It is felt when the outcome of a non-chosen alternative is better than the outcomes obtained. Regret is a functional emotion that helps people to correct mistakes. It is also functional because people can anticipate regret beforehand, then choose in such a way as to avoid regret from happening. Researchers in economics proposed regret theory, an alternative to rational choice theory, which takes into account the anticipation of regret and its influence in choice. Researchers in psychology studied how anticipations of regret influence decision making in a variety of domains, including health behaviors. The findings suggest that interventions can be developed that are based on the idea that people are regret averse.

Auctions with Anticipated Regret: Theory and Experiment

This paper demonstrates theoretically and experimentally that in first-price auctions overbidding with respect to the risk neutral Nash equilibrium might be driven from anticipated loser regret (felt when bidders lose at an affordable price). Different information structures are created to elicit regret: bidders know they will learn the winning bid if they lose (loser regret condition); or the second-highest bid if they win (winner regret condition); or they will receive no feedback regarding the other bids. Bidders in loser regret condition anticipated regret and significantly overbid. However, bidders in the winner regret condition did not anticipate regret. (JEL D44)

Choosing What I Want versus Rejecting What I Do Not Want: An Application of Decision Framing to Product Option Choice Decisions

The authors examine the effects of using a subtractive versus an additive option-framing method on consumers' option choice decisions in three studies. The former option-framing method presents consumers with a fully loaded product and asks them to delete options they do not want. The latter presents them with a base model and asks them to add the options they do want. Combined, the studies support the managerial attractiveness of the subtractive versus the additive option-framing method. Consumers tend to choose more options with a higher total option price when they use subtractive versus additive option framing. This effect holds across different option price levels (Study 1) and product categories of varying price (Study 2). Moreover, this effect is magnified when subjects are asked to anticipate regret from their option choice decisions (Study 2). However, option framing has a different effect on the purchase likelihood of the product category itself, depending on the subject's initial interest in buying within the category. Although subtractive option framing offers strong advantages to managers when product commitment is high, it appears to demotivate category purchase when product commitment is low (Study 3). In addition, the three studies reveal several other findings about the attractiveness of subtractive versus additive option framing from the standpoint of consumers and managers. These findings, in turn, offer interesting public policy and future research implications.