Regret (decision theory)

In decision theory, on making decisions under uncertainty—should information about the best course of action arrive after taking a fixed decision—the human emotional response of regret is often experienced, and can be measured as the value of difference between a made decision and the optimal decision. The theory of regret aversion or anticipated regret proposes that when facing a decision, individuals might anticipate regret and thus incorporate in their choice their desire to eliminate or reduce this possibility. Regret is a negative emotion with a powerful social and reputational component, and is central to how humans learn from experience and to the human psychology of risk aversion. Conscious anticipation of regret creates a feedback loop that transcends regret from the emotional realm—often modeled as mere human behavior—into the realm of the rational choice behavior that is modeled in decision theory. Regret theory is a model in theoretical economics simultaneously developed in 1982 by Graham Loomes and Robert Sugden, David E. Bell, and Peter C. Fishburn. Regret theory models choice under uncertainty taking into account the effect of anticipated regret. Subsequently, several other authors improved upon it. It incorporates a regret term in the utility function which depends negatively on the realized outcome and positively on the best alternative outcome given the uncertainty resolution. This regret term is usually an increasing, continuous and non-negative function subtracted to the traditional utility index. These type of preferences always violate transitivity in the traditional sense, although most satisfy a weaker version. Several experiments over both incentivized and hypothetical choices attest to the magnitude of this effect. Experiments in first price auctions show that by manipulating the feedback the participants expect to receive, significant differences in the average bids are observed.