Minimizing Regret: Don't merely lament missed gains—use the lesson to guide trading discipline
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Minimizing Regret: Don't merely lament missed gains—use the lesson to guide trading discipline
Research shows that if humans can reflect on their actions through "regret" after making mistakes, they gradually improve their decision-making abilities.
Navigating Web3 tides with focused insightsAuthor: Felipe Montealegre (IFS)
Translation: TechFlow
If You're So Smart, Why Did You Miss XRP? On Regret-Minimization in Volatile Markets.
Traditional economics studies how rational agents make optimal decisions and reach equilibrium, while Algorithmic Game Theory attempts to answer a more realistic question: Can humans, by following simple rules, come close to—or even mimic—optimal decision-making? Regret-minimization dynamics is a key research area that helps us understand when and how such simple rules can approach optimal outcomes.
Research shows that when humans make mistakes and then reflect through "regret," they gradually improve their decision-making. Anyone learning a new skill experiences this: for example, when playing Catan, you might realize you shouldn't have focused too much on sheep, as wool prices inevitably drop during the city-building phase; or in tennis, you learn not to attempt backhand winners when tired. These lessons accumulate through regret, gradually pushing your performance closer to your personal efficient frontier.
We’re currently in the midst of a frenzied bull market. Every morning, seeing some “out-of-bag token™” surge 150%, even 1500%, you might torture yourself with regret. Perhaps a friend mentioned it last week, you bookmarked a post about it, saw it on TikTok, and thought, “Kids might like this.” But is this kind of regret a healthy reflection that makes you a better investor, or just unnecessary self-punishment?
To answer this, we need to distinguish three types of regret and respond accordingly.
External Regret occurs when, in hindsight, you realize you made a wrong choice. For instance, in Texas Hold’em, you go all-in with pocket Aces, but your opponent hits a Full House on the river. Or you try a new Chinese restaurant and find the food disappointing—when you could’ve ordered from Dim Sum Palace instead. As a fundamental investor, you feel external regret when you miss XRP’s explosive rally. After all, capturing a 5x move within 15 days sounds great in retrospect. But external regret isn’t a good basis for learning, because in a probabilistic world full of uncertainty, anything can happen. If you regret every missed opportunity, you’ll erode confidence in your consistent, logical investment philosophy and discipline.
So the real question isn’t “Should I have bought XRP?” but rather, “Should I change the investment rule that prevented me from buying XRP?” This is where Swap Regret comes in.
Swap Regret arises when you regret following a particular rule and wish to replace it with a better one. For example, in poker, you bet big with 7-4 offsuit despite two Aces already on the board—just because you were bored of folding. You experience swap regret. You followed the rule “bet big when bored,” which is clearly suboptimal. You have good reason to replace it with a more rational strategy, like “bet based on win probability calculations.”
Likewise, when Warren Buffett shifted from the “cigar butt” approach to investing in “compounding businesses,” he was experiencing swap regret. He abandoned the rule “buy assets cheap relative to intrinsic value” and adopted the superior rule: “invest in companies with strong moats, high return on capital, and sustainable growth.” This shift reflects his process of learning from past experience and continuously refining his decision rules.
In the earlier restaurant example, you won’t feel swap regret unless you consider changing your rule from “I’ll try new restaurants” to “only visit ones I already know I like.” The essence of swap regret is rule evaluation and optimization. It pushes you to examine the rules guiding your decisions and ask whether a better rule exists—one that would lead to improved outcomes.
If you want to truly minimize regret over missing XRP, ask yourself: Is there a better rule that would have led you to make the right investment decision? Potential rules might include: “Whenever an old friend texts me a coin is about to ‘moon,’ I should buy,” or “I should invest in tokens trending rapidly on TikTok.” In fact, I see many people attempting to refine their investment rules through this kind of swap regret.
But for me, no rule within my investment philosophy—even a slightly adjusted version—would have justified buying XRP. Therefore, I don’t regret missing it. Swap regret is only warranted if you’re willing to change the rules governing your behavior.
Swap regret is the core concept; internal regret is simpler to grasp.
Internal regret happens when you fail to follow your own rules. For example, you tell yourself you’re a contrarian investor who will hold through downturns, yet you panic-sell SOL at the bottom due to “paper hands,” and later feel internal regret. Similarly, famed investor Druckenmiller bought into tech stocks at the peak of the 2001 bubble, knowing it was a mistake at the time, and later expressed deep internal regret.
With internal regret, you *should* “torture” yourself—to learn and build discipline. Only by reinforcing adherence to your rules can you prevent repeating the same mistakes.
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