Negative Utility and Regret
Before shifting to two other powerful and often emotionally driven ways in which to manage money (risk and envy), I wish to return to the matter of negative utility as related to Regret. First, we are likely to find all forms of negative utility related to the emotion of regret. Certainly, we find profound societal regret associated with a major negative utilitarian perspective. This large (distal) perspective concerns the immoral history of slavery in the United States. A great deal of harm is associated with this long-enduring practice in our country. We can also point to the regret associated with the endangerment of species because of our culinary habits.
Destruction is also associated at the personal (proximal) level with the failure to satiate a hunger for an addictive, health-aversive substance (such as alcohol and pain-reducing drugs). We may profoundly regret this addition yet find it hard to withdraw from this addiction. From another domestic (proximal) perspective that is less dramatic, we experience regret in our overly stuffed stomach that is associated with that extra piece of pie.
Finally, we can return to the broccoli. We decide to buy the stemless broccoli but later regret the extra price we paid: “Why must we be charged for this cutting off of the unused portion of the Broccoli! “Alternatively, we buy broccoli with stems intact and find ourselves annoyed in having to do the chopping ourselves. A similar refrain: Why can’t they cut off the unused portion of the Broccoli as a customer service!”
All of this makes sense. Multiple forms of negative utility and multiple sources of regret. Yet, something seems to be missing, especially when it comes to negative utilities, regret, and money. As the name implies, negative utility can involve holes. It is not just the presence of actions taken with negative consequences; it is also the matter of actions not taken (which the behavioral economists tend to emphasize). When it comes to broccoli, we might regret not even going to the store to purchase broccoli (with or without stems). We are invited to our neighbor’s home for dinner, and they feature a lovely serving of broccoli topped with an exquisite hollandaise sauce. Our neighbor mentioned that the broccoli was on special and was picked locally. You savor the fresh taste of the broccoli and regret not having gone to the store for your own stash of locally grown broccoli.
Many more important holes have never been filled. These are financial holes, related to our failure to make a timely investment or properly manage a business that we own. These negative utilities relate directly to profound regret regarding the management of money. In his study of the psychology of money, Housel (2020, p. 80) considers this matter of pocketbook regret:
“It’s easy to find Warren Buffett’s net worth, or his average annual returns. Or even his best, most notable investments. They’re right there in the open, and they’re what people talk about.
It’s much harder to piece together every investment he’s made over his career. No one talks about the dud picks, the ugly businesses, the poor acquisitions. But they’re a big part of Buffett’s story. They are the other side of tail-driven returns.
At the Berkshire Hathaway shareholder meeting in 2013 Warren Buffett said he’s owned 400 to 500 stocks during his life and made most of his money on two of them. Charlie Munger followed up: ‘If you remove just a few of Berkshire’s top investments, its long term track record is pretty average.’
