The title of the post comes from correspondence from Danny Kahneman to Amos Tversky regarding insights into irrational human decision-making processes. It was during their collaboration in elucidating the concept of loss aversion. Regret minimization is a related but distinct concept.
Given dual-choice gambles where a rational actor should choose the option with greater statistical odds of benefit according to pure theory, humans often deviate and make the irrational choice to forego the greater benefit because they seek to minimize regret. The bird in the hand is worth two in the bush thanks to the imagined misery of potential birdlessness.
The partnership between these psychologists created the field of behavioral finance, as detailed in The Undoing Project by Michael Lewis. In reading the book, I began to review my bucket list as if it were primarily designed to minimize regret, and it gave me a new set of insights.
One of the genuine pleasures of blogging has been the friendships that have blossomed, virtually and otherwise, with fellow physician finance bloggers. I am incredibly grateful for the advice, support and general camaraderie these friendships sustain.
For example, one friendship I've come to deeply value is with Matt Poyner, a financially independent Canadian ER doc who responded to burnout by quitting his job, selling his home, and taking his wife and four young sons on a year-long odyssey of travel and world-schooling across the globe. You can find his experiences beautifully rendered at Big Family, Small World.
Matt's a fascinating and thoughtful guy, and I've profoundly enjoyed our correspondence over the past year. Reading the Lewis book, I realized that part of what I find so compelling is that he was willing to take a chance in a way I have not, sacrificing security and the known in favor of adventure and the unknown.
His decision was obviously poly-factorial: he worked a difficult job in a very broken health system, he felt beat down, and thanks to financial independence he had the option to change his life drastically.
Yet it seems compatible that two concepts in behavioral finance, framing and regret minimization, played some important role in his family's decision-making process. Matt (and his family) had the uncanny ability to frame the anticipated the regret that foregoing that adventure would cost them and decided to pursue it as a result.
It seems almost contradictory at first glance: most examples of regret minimization in finance are taking the sure thing instead of the gamble for a greater win.
Yet when one acknowledges that decision making is not only about maximizing utility but also must account for minimizing regret, it all adds up. The prospect of never living up to that potential great unifying family travel experience was too great to resist.
It's interesting to attempt to dissect how a seemingly contrarian thinker shares the same irrational decision-making mechanisms that we do, but is simply able to frame questions in such a way that the answer leads to an unconventional decision.
Applying the lens of regret minimization helps me view his choice with a shared appreciation of our human frailties. My actions to date suggest that I cannot stomach the risk of taking my family abroad for a year because I'd regret if it turned out to be anticlimactic, if we tired of travel the way we'd tire of ice cream at every meal, if our return to community after that time might turn out to be a let down.
Matt looked at the same question and concluded the risk of inaction, the degree of regret he'd experience for not taking that chance, heavily tipped the scales in favor of a family gap year.
Neither of us could stomach the regret, and we acted accordingly, coming to entirely different yet internally rational conclusions.
Despite our brains being wired in the same way, our choices can still turn out to be weird in different ways.