Money Psychology

The Four Causes of Financial Regrets and How to Overcome Them

July 28, 2023

At some point, everyone has been haunted by their financial decisions. It could be something small like overspending by Ksh2,000 on a night out or something significant like following the herd and investing money in a Ponzi scheme because you didn't do any research.

Nonetheless, financial regrets can cost you now and in the future, depending on their magnitude. They’re different for each person, and undoing them often requires making even more complex decisions. Regrets are uncomfortable and, to some extent, inevitable. The best you can do is learn how to overcome them.

This article will explore the four causes of financial regrets, how they manifest themselves, and what steps you can take to overcome them.

Buyers Remorse

Buyer’s remorse refers to the lingering feeling of regret, dissatisfaction, and guilt you can sometimes get after making a purchase. It occurs when there is a mismatch between your beliefs or values and any financial action you have taken.

You are likely to experience buyer’s remorse when you spend money on a product or service only to figure out later that it doesn’t meet your expectation, you don’t need it, you discover better alternatives, or you get a perception that you overspent. When any of this happens, you might start second-guessing your decision and feeling a sense of regret.

With that in mind, how can you overcome buyer’s remorse?

Take A Cooling-off Period: Before spending money, consider taking 24 to 72 hours to think about your actions and whether your purchase is worth it. During this time, you might want to consider the value of the particular product/service and whether you can live without it. This tactic will help you avoid impulse purchases.
Research: One of the biggest causes of post-purchase regret is buying things blindly without comparing prices or considering alternatives. Before paying for anything, do your homework to ensure you get the best deal price-wise and quality. You can do your in-depth research after the cooling-off period.
Plan Your Purchase and Establish a Budget: First, determine how much you can comfortably spend on a particular purchase without straining your finances. Next, save for the particular product/service if it isn’t an emergency to avoid using funds saved for other goals or going into unnecessary debt. This process allows you to stick to your spending limits to ensure you don't exceed your budget.
Consider The Long-Term Costs: Some purchases, such as electronics or appliances, and bigger purchases, like cars and homes, come with additional costs beyond the initial price. Consider factors like maintenance, repairs, and ongoing expenses like subscriptions or insurance. Considering the long-term costs allows you to assess whether a purchase aligns with your overall financial goals and can help you avoid overextending yourself financially and experiencing regret later.

Opportunity Cost Regret

Opportunity cost is the regret or dissatisfaction resulting from a financial decision not made or an alternative decision made. It encompasses missed opportunities and unrealized gains that could have been attained through a different choice or action.

Opportunity cost is the value of the best alternative you miss out on due to making a different decision.

For example, if you choose to invest in a certain way, your opportunity cost is the money you could have made by investing in a different venture. In this case, regret stems from realising that the alternative venture could have yielded higher returns as it was the best option.

Opportunity cost also plays a role in everyday life. Every purchase comes with an opportunity cost, which is the value of the next best alternative you could have chosen. For instance, if you spend money on eating out frequently, you may miss out on the opportunity to save for a vacation.

It represents the feeling of regret arising from recognizing the potential benefits or advantages that were foregone due to a different course of action or inaction. Understanding opportunity cost helps in making better choices. Not considering the alternatives can result in missed opportunities.

To overcome opportunity cost, you should:

Factor in time: For example, when investing, the longer you hold an investment, the more time it takes for its returns to materialize and offset the opportunity cost. This is because you are likely to weather market fluctuations or benefit from the power of compounding depending on your investment strategy.
Diversify: This is a risk management strategy that can help you minimise the impact of opportunity cost. When you spread investments or resources across different options, you reduce the risk of relying too heavily on a single one. This way, if one option doesn't generate expected returns, you have other options to fall back on.
Embrace a growth mindset: Since every decision involves sacrificing at least one alternative, opportunity cost is unavoidable but when you acknowledge that decisions involve trade-offs and learning opportunities, you are more likely to make a more informed choice.
Have an Opportunity Fund: This is money you set aside to seize unexpected but valuable opportunities when they arise. It allows you to take advantage of unexpected situations without sacrificing other financial goals or resources.
Do Act Blindly: Research and do a cost-benefit analysis by evaluating each alternative's potential gains and losses and weighing them against each other.

Sunken Cost Fallacy

The sunk cost fallacy refers to the tendency to continue investing in a project or decision solely because of the resources (time, money, effort) already invested, even when it is clear that the decision is no longer financially viable or beneficial.

The sunk cost fallacy is typically preceded by sunk cost dilemma when you might have to decide if you should continue or discontinue a project, provided you have invested your resources but still have not achieved the desired outcome.

At this stage, you might be overcome by disappointment over your decisions. This regret often stems from the realization that additional investments will not be able to recoup the initial losses and can lead to further financial setbacks.

Consider this example: You've invested substantially in repairing your car, but halfway through, you question its value. Sunk costs come into play when you cannot undo the services or recover the money you've spent. Now you're torn between continuing the repairs and hoping for a satisfactory outcome or accepting the sunk costs and considering alternative repairs.

The sunken cost fallacy happens when you continue the repairs and hope for a satisfactory outcome because you don't want to accept the irrecoverable expenses/losses you've incurred.

To overcome the regret associated with sunk cost fallacy, you should:

Assess your investments periodically: Regularly review your investments and projects to ensure that you are making progress toward your goals. This practice will help you identify when a strategy is ineffective, allowing you to make necessary changes or adaptations early on.

Consider opportunity cost: When you persist with a losing asset or investment strategy, you not only continue with an unsuccessful position but also miss out on potential gains that could have been achieved with an alternative approach. Recognizing when to cut your losses is crucial.

Avoid becoming emotionally attached to your financial decisions: The sunk cost fallacy often arises from the fear of failure. If you continue injecting more funds into a failed project solely to recover sunk costs, you run the risk of incurring further losses. Instead of relying on emotions, consider approaching decisions rationally.

Social Comparison

As individuals, it is natural for us to compare ourselves with others. However, the people with whom you choose to compare yourself and how often you make these connections can significantly impact how you feel about your finances.

When you make upward comparisons, i.e., compare yourself negatively with people doing better than you financially, it can affect your financial well-being, causing you unnecessary stress and regret when you notice that the person you're comparing yourself to is better off because they made different decisions from yours. This phenomenon is known as social comparison.

The theory of social comparison was introduced by Psychologist Leon Festinger in 1954. He suggests that humans have an inherent motivation to assess and evaluate themselves by drawing comparisons to others.

Social comparison results from comparing your financial situation or decision to that of others and feeling a sense of disappointment or dissatisfaction with your condition or choices. This type of regret can stem from perceiving that others have made better or more successful financial decisions, leading to a sense of inadequacy or a feeling that you made the wrong choice in comparison.

To overcome social comparison, you should:

Be aware of your triggers - What makes you compare yourself to others? Is it social media, conversations with friends, or something else? Once you know your triggers, you can start avoiding them or developing coping strategies.
Redefine your comparison targets - Regrets often happen when you make an upward comparison. Instead of comparing yourself to people better off than you, try comparing yourself to people in a similar financial situation. This practice is known as lateral social comparison, and it can help you feel more grateful for what you have and less envious of what others have.
Find a financial role model - Find someone who has achieved financial success in a way you admire. This person can be a mentor, a friend, or a family member. Following their example can help you stay motivated and on track with your financial goals.
Focus on your progress - Don't compare yourself to others' starting points or end goals. Instead, develop your own financial goals and focus on them. This will help you stay motivated and less likely to compare yourself to others.
Practice gratitude - This can help you appreciate what you have and reduce the urge to compare yourself to others. You can achieve this by focusing on your progress and celebrating your accomplishments, no matter how small they may seem

WRAPPING UP

Regret is a common emotion, but it is also avoidable. Regret can have many negative effects, including causing anxiety, depression, and poor self-esteem. All this can lead to people making decisions not in their best interests.

The best way to avoid regret is to make well-thought-out plans, assess risk, and consider getting expert help. When you make a decision, take the time to consider all of your options and the potential consequences of each option. If you are unsure about what to do, consider talking to someone you trust who can help you weigh the pros and cons. This can be friends, your mentor, or a licenced financial advisor.

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Farah Nurow is an experienced Content Writer who enjoys writing creative and educative articles meant to provoke readers' thoughts. He loves sunny weather and thick books. You can connect with him on LinkedIn.