Regret Minimization

Hi Guys,

Regret minimization is not a new topic. It is studied in academic circles and oftentimes has rather sophisticated mathematical modeling coupled to it.

But a very thoughtful, practical column on that subject appeared in today’s “A Wealth of Common Sense” by Ben Carlson. Here is a Link to that article:

http://awealthofcommonsense.com/regret-minimization/

The piece discusses the tradeoffs between risk and reward, and the need for a balanced investment approach for portfolio survival during the down cycles. Long term thinking is mandatory. It concludes that risk can not be entirely eliminated. Therefore an investor must develop a resilience capability.

Just this year a book that emphasizes the need for resilience and how to learn it has been published. The book is titled “Stronger”. It was written by three men who have terrific backgrounds in this field including one Navy SEAL. I recommend the book although I have only part way finished it.

The book identifies five resiliency elements: active optimism, decisive action, a moral compass, persistent tenacity, and a reliable support structure. The good news is that the authors believe resiliency can be learned. Failures are learning experiences. To sharpen resilience, study history and successful investors from the past. And keep things simple. I look forward to more tips as I complete the book.

In the end, I suspect that keeping cool under duress, having a diversified portfolio, having a reserve that allows the markets to return to you, and having a long term perspective will again be the advice offered. Not too much new there, but the repetition from experts gives comfort. Bogle’s “staying the course” is again practical wisdom, but sometimes difficult to execute.

By the way, in the article, Carlson asked this series of questions: “Some investors will regret missing out on huge gains while others will regret participating in huge losses. Which regret will wear worse on your emotions? Missing out on future gains or future losses?”

Kahneman and Tversky’s answer to those questions are embedded in their Prospect Theory. In Prospect Theory, expected gains and losses have an asymmetric impact on an individual’s emotions. Gains are appreciated one-half as much as losses are feared. Therefore, most folks would not accept a potential 10 dollar gain if a 10 dollar loss was equally possible. The wager would only be accepted if the potential 10 dollar loss was matched against an equally likely 20 dollar winning reward.

Please give “Stronger” some consideration.

Best Regards.