Norms and Regret
Imagine this scenario: you are the parent of a 3-month old baby who is sleeping soundly in her crib. You get a call from your other child’s preschool that he is sick and you need to come and pick him up. It will take 15-minutes to get to your sick child and return back home. What do you do? Should you bring your baby with you? Or would you leave her home alone and asleep? Think about it for a bit.
This example is adapted from a paper by economists William Samuelson and Richard Zeckhauser who posit that:
most parents would not dream of leaving a baby alone, sleeping in its crib, while they took a 15-minute auto trip to run an errand. In the extremely unlikely case that the child was killed in a fire, the parents would feel tremendous regret and guilt. However, many of the same parents would not hesitate to take the child along in the car, though the safety risk in the car is arguably an order of magnitude greater than in the house. The element of guilt associated with a bad consequence would be considerably less [in the car accident scenario].
Samuelson and Zeckhauser expect that a parent would feel more regret about leaving a baby alone than taking the baby in the (much more dangerous) car because it is a strong social norm not to leave a child unattended. Making decisions contrary to norms which result in bad outcomes have been shown to create more regret than bad outcomes where the decision was in conformity with norms.
The Norms Theory of Regret was proposed by Daniel Kahneman and Dale Miller in 1996 and states that regret occurs when a bad outcome occurs that causes the person to think about what could have happened differently. This is called counterfactual thinking and people think about counterfactuals more when they violate their (or society’s) norms. An example from the Kahneman and Miller paper and the response of people surveyed:
Mr. Jones almost never takes hitch-hikers in his car. Yesterday he gave a man a ride and was robbed.
Mr. Smith frequently takes hitch-hikers in his car. Yesterday he gave a man a ride and was robbed.
Who do you expect to experience greater regret over the
Mr. Jones: 88% Mr. Smith: 12%
We expect Mr. Jones to have greater regret because we can more easily imagine the situation where we didn’t undertake the action in question if it is an action that is out of the ordinary. Another great example from the Kahneman & Miller paper:
Mr. Adams was involved in an accident when driving home after work on his regular route. Mr. White was involved in a similar accident when driving on a route that he only takes when he wants a change of scenery. Who is more upset over the accident?
Mr. Adams: 18% Mr. White: 82%
Action vs. Inaction and Regret
Bad outcomes that are caused by actions and inactions are regretted differently even if they lead to the same outcome. This is called the “action-effect” and is a mental model whereby people regret actions that lead to negative outcomes more than they regret inactions leading to the same negative outcomes.
A great example of this is a 1996 experiment where students were given lottery tickets. Before the drawing, the students were asked to exchange their lottery ticket for a different ticket plus a piece of chocolate. Of course, the chance of winning was the same for each lottery ticket. So, unless you hated chocolate, you should trade your ticket for another ticket plus chocolate. The study found that 59% of the students wouldn’t exchange their lottery ticket because of the regret they’d feel if they had the winning ticket and had exchanged it.
A related reason for not exchanging the lottery tickets is the Endowment Effect.
Business Insider tested this lottery ticket experiment by offering people money in return for their just purchased lottery tickets. Most of the lottery ticket buyers were not willing to sell their tickets for MORE than they just paid for the ticket because they would feel great regret if they sold a winning ticket. If you click here, you can watch a video of people refusing to turn a quick profit on their lottery tickets.
An Example of action-effect from the Kahneman & Miller paper:
Mr. Paul owns shares in company A. During the past year he considered switching to stock in company B, but he decided against it.He now finds out that he would have been better off by $1,200 if he had switched to the stock of company B.
Mr. George owned shares in company B. During the past year he switched to stock in company A. He now finds that he would have been better off by $1,200 if he had kept his stock in company B. Who feels greater regret?
Mr. Paul 8% Mr. George 92%
Consider another related example based on a real story: Mr. White has never bought Bitcoin, but had seriously considered buying it years ago when it was just a few dollars a coin. If he had bought Bitcoin back when he thought about it, it would now be worth over $1 million.
Mr. Black bought Bitcoin years ago when it was just a few dollars. He sold it after making a few hundred dollars. If he had not sold the Bitcoin it would now be worth over $1 million.
Who has greater regret? Mr. White or Mr. Black. Obviously, Mr. Black does. He actually had Bitcoin and sold it. What is very interesting about this example is that Mr. Black is actually in a better situation – at least he made a few hundred dollars off the Bitcoin whereas Mr. White earned nothing. Yet, we’d rather be in Mr. White’s shoes.