Did you know that silver medal winners are less satisfied with their performance than bronze medalists? Weird, right? If you asked any athlete, they would say that winning the silver is better than winning bronze. So why is the reaction opposite in reality?
According Medvec, Madey and Gilovich - the researchers behind the OL study - this is due to counterfactual thinking and feeling of regret. For endless these, the researchers coded the winners' immediate reactions and facial expressions when athletes received their medals, and based of their studies they observed that the bronze winners seemed happier simply because they won a medal, while the silver winners could not forget that they almost won gold.
This is relevant not only to medal winning athletes but to all of us, as we continuously seek to avoid situations and decisions that we might regret later. This tendency to minimise any prospect of regret can lead us to take less optimal decisions.
For example, investors hold on to bad stocks too long in the hope that they will someday be profitable again, or conversely that investors sell profitable stocks too early to cash in the profits before any sudden turn that might result in a loss.
When we make decisions, in the back of our minds we know that we sometimes regret our decision and we try to anticipate this situation in various ways. Our intuition about regret is very consistent and convincing, as the next example of Daniel Kahneman illustrates:
Test: Selling company shares
"Paul owns shares in Company A. During the past year he considered changing to shares in company B, but he decided not to do it. He understands now that he would have had $1,200 more if he had switched to company B."
"George owned shares in Company B. Last year he switched to shares in Company A. He understands now that he would have had $1,200 more if he had retained his shares in company B."
Before you read on, who do you think regrets his decision the most? Do you have your answer? Ok.
The result of Kahneman's study was quite clear: 92 percent said George regretted his decision the most, while 8 percent say that it was Paul.
The strange in these responses is that both investors' situation is objectively the same. They now both own shares in company A and they would have had the same extra amount if they owned shares in Company B. The only difference is that George ended up there by trading while Paul ended that by failing to act.
Prefer omission to commission
This small example highlights a general pattern: As humans, we share the common tendency that we have stronger negative reactions to a result that is the consequence of us making an active decision, than the same result due to lack of action. Our concern stems not such much from our choice to act or not to act, but rather the difference between the standard choices and actions that deviate from the standard.
When faced with uncertain decision with a possible side effect of regret, we feel better about decisions made by omission (sticking with status quo) than decisions made by commission (changing status quo).
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