Regret makes you a bad investor and prone to the worst mistake, says Daniel Kahneman

Kahneman said that he was not a very good example for thinking fast and slow. In fact, he said, he was a good illustration of the mistakes he has written about.

Regret is deadly for investors and people prone to this emotion should not take too many risks, said Daniel Kahneman. The Nobel Laureate reasoned that regretful people were most likely to make the worst mistake an investor can make, of buying high and selling low.

Kahneman died on March 27.

The renowned economist and psychologist had spoken to Moneycontrol in an exclusive interaction in 2023.

When things go bad

“When things are going bad, you are inclined to sell and you don’t stick with your decisions. People who are prone to regret are going to be doing that,” Kahneman said. That is, there is a general tendency to waver from decisions when things don't go your way and this tendency is more pronounced in people who are given to regret.

Kahneman explained that regretful investors would blame their advisors and themselves when things are bad. They will also sell their holdings at a lower price when markets are down, thus doing the buy high and sell low, which is the worst thing that an investor can do, he said.

Also read: Why Richard Thaler gets mad at Daniel Kahneman and the virtues of being lazy

“People who are prone to regret shouldn’t take too much risks,” Kahneman said. He added that investors who have the urge to sell their stock during market dips should also stay away from the markets.

The stock market is a place where he and his academic adversary Gary Klein agreed that intuition is useless. Kahneman said that intuition requires regularity and predictability. “Almost by definition, stock market is not predictable. So it’s not a place for intuition,” he added.

Talking about his investment strategies, Kahneman said he invests in index funds which are agreed by behavioural economists as the place to invest and he simply follows the advice of his friends. He called himself pessimistic, though a "cheerful pessimist".

Element of luck

The economist also pointed out that luck has played a large part in ace investor Warren Buffett’s success. “There is no question that there is a large component of luck. When you are operating in a very uncertain environment, consistent success means certainly having an element of luck. There is an element of skill, but you need both. And when you look retrospectively, it all looks like skill, but you should know that more luck was involved than you are inclined to think. We generally don't give enough weight to luck,” Kahneman said.

Check out his full interview with Moneycontrol here.