Regret and Cognitive Dissonance

"There is a human tendency to feel the pain of regret at having made errors, even small errors, not putting such errors into a larger perspective. One "kicks oneself" at having done something foolish." (Shiller 1997, 7) In trying to avoid the "pain of regret", one may act in ways that would otherwise be viewed as irrational if account is not taken of the pain of regret.

There is also regret over mistaken beliefs, where people distort logic for themselves in order to justify actions that could lead to regret. They may also reject new information that could suggest that their actions were wrong. "A classic study by Erlich, Guttman, Schopenback and Mills (1957) showed that new car purchasers selectively avoid reading, after the purchase is completed, advertisements for car models that they did not choose, and are attracted to advertisements for the car they did choose." (Shiller 1997, 8)

"Regret theory may apparently help explain the fact that investors defer selling stocks that have gone down in value and accelerate the selling of stocks that have gone up in value, Shefrin and Statman (1985)" (Shiller 1997, 8). A person may avoid selling a stock that has depreciated so as not to finalize the error and thus suffer the regret of having made the error. He/she may sell the appreciated stock so as not to risk failing to do so before the stock later falls, should that occur.