Risk and Regret
David Cassidy’s last words were, “So much wasted time.”
What a terrible thing to realize when it’s too late. And I wonder if it’ll become more common as many of us spend our days aimlessly scrolling our phones.
Regrets are a dangerous liability because their final costs are often hidden for years or decades. And decisions that are easiest in the short run are often the most costly in the long run.
Daniel Kahneman once said an important part of becoming a good investor is having a well-calibrated sense of your future regret. You need to accurately understand how you’ll feel if things turn out differently than you hoped.
Maybe regret is the best definition of risk.
Risk isn’t how much money you might lose. It’s not even necessarily how you’ll feel when you lose it – over time, a lot of painful experiences turn into cherished lessons. Real risk is the regret (or lack thereof) that might come years or decades later.
Jeff Bezos once described his decision to start an online bookstore in the mid-1990s:
The framework I found which made the decision incredibly easy was what I called the regret minimization framework.
I wanted to project myself forward to age 80 and look back on my life and I want to have minimized the number of regrets I have.
And I knew that when I was 80 I was not going to regret having tried this. I was not going to regret trying to participate in this thing called the internet that I thought was going to be a really big deal.
But I knew the one thing I might regret is not ever having tried.
And I knew that that would haunt me every day. So when I thought about it that way it was an incredibly easy decision.
This is great. Most people don’t have the personality that can quickly move on from a failed project you’ve devoted your life to, but maybe he does. The important thing is that he knew it. Or maybe he would have been devastated if Amazon failed, but by age 80 he would laugh about it with no regrets. That’s equally important to know about yourself.
The other side of this is that most ordinary people can afford to not be a great investor, but they can’t afford to be a terrible one. Warren Buffett once remarked on the failed hedge fund Long Term Capital Management and said, “If you risk what you need in order to gain what you don’t need, that is foolish. It’s just plain foolish.” I also like the saying, “‘YOLO’ is just as good a reason to not do something.”
We spend so much time trying to quantify risk when the answer is just figuring out what you will or won’t regret. The anonymous Twitter account FedSpeak wrote, “The purpose of life is to experience things for which you will later experience nostalgia.” The opposite of regret.