In my previous article I made an argument for satisficing rather than maximizing. The homo economicus might have the time to endlessly research market options to find themselves the best phone, laptop, wireless headphones, health insurance or home, I do not. Armed with my list of criteria I conduct my search and as soon as I find a maximum of three options that satisfy those criteria, I pick one of the three. And quite often, I just let my friends advise me. Especially on topics I know very little about. And you know what, so far, so good.
The desire not to satisfice is all very much in line with FOBO – the Fear of a Better Option. The whole idea of satisficing, or settling in the more common tongue, is that what we’re choosing is not the maximum. It is not the most optimal choice for us out there, if you believe such a choice to objectively exist. So quite likely if we have satisficed and are then faced with a different option that we also could have picked, this will make us feel different about the choice we have made. One of those feelings we might experience is regret. And that is the topic of today’s article.
Everything exists in context, and nothing exists in isolation. Well, mostly. We know the worth of most things as we have compared them to others. This may not be an objective worth, but a more subjective worth – the worth it has to us (utility rather than value).
Through the process of habituation, often due to sheer exposure, we have established what we find a “normal” price to pay for things. We know that a house costing $5000 is suspiciously cheap, as well as knowing that a bread costing $5000 would be ridiculously expensive.
In addition to knowing what price level we deem as normal, and what price level we are, as a result, comfortable enough with, we have to decide what we expect to have for that price. What do we want for that money? All of this should sound familiar to you, as this is also outlined in the article I wrote last week on satisficing. Just pick something!
It’s now that we come back to regret, and nothing existing in isolation. As soon as you have committed to something, you have purchased it, your utility (a.k.a. enjoyment) of that product is not solely going to be based on its functionality and it fitting your needs and desires. No, there’s many other factors at play here.
There’s many reasons why something might not fulfill the utility requirement you had expected it to. Just go back to childhood or maybe your teenage years. Being in high school it was imperative that you had the right clothes, the right phone, the right book covers even. It was all about social hierarchy and you couldn’t risk falling too low. Buying an item that could lose you your social status was not an option. Regret would be imminent. You might have been happy with your new shoes and derive a lot of utility from them being just by yourself. But if you wore them out and your social group(s) made fun of them, had negative things to say about them, or simply rejected them, that would hurt you as a person, and your utility from those shoes would drop severely. It might even become negative, known as disutility. You probably no longer liked your shoes at all, never wore them (out) again, regretted buying them and wished you had spent the money on something else. That’s regret theory for you.
Moving on from my teenage trauma, let’s just look into regret theory in isolation (without considering social situations). Regret can just as easily happen to an individual without the input of others. Going back to the satisficing article: most markets continuously update, especially in the technology sphere. By the time you’ve done your research on which phone/laptop/surround sound system to buy, have established your WTP, and have actually bought the damn thing, most likely there’s already new things on the market. It happens.
Now as I’ve outlined in that article, you can be perfectly happy with this new surround sound system. As long as you don’t keep shopping around. You will almost always find a better deal, if you invest enough time. And sometimes, you will just find a better deal by having waited another month, another six months, another year etc. Technology updates quickly. The knowledge that there is a better deal out there, and this is knowledge as you have established this by shopping around some more, reduces the utility you derive from what you already have. So don’t do it!
When it comes to satisficing, or just actually committing to things without spending significant amounts of valuable time on researching “the best deal”, FOBO is also really important. It’s a prime example of regret theory kicking in before a purchase is even made. Yes, before the purchase. You haven’t even committed to anything and you’re already factoring in regret. Isn’t the human mind a wonderful thing?
With the fear of a better option, you are so consumed by the idea that you haven’t exhausted all the possibilities yet, that that fear in and of itself leads to regret. There is a pure anguish to not having “seen it all” before making a choice. I personally don’t suffer this, I’m not a perfectionist in the slightest, but it sounds exhausting to me. FOBO is as useful to decision-makers as a bicycle is to a fish.
How does one deal with regret, you might ask. And it’s a good question. The simple solution is to not shop around after you’ve made a purchase. Do not keep looking. You’ve made your bed, now lie in it. When it comes to being scared of “society” or more specific social groups not accepting your choice (if that means anything to you), just ask a prominent member in that group to help you pick something. This also helps if that member, or any member in your social group, is an expert on the thing you’re trying to buy. Are you aiming to build and order a customized laptop, but you’ve got no idea where to start? Well, ask help from an expert. That’ll do. In addition to an expert knowing better than you, in case of regret, you can blame them, and don’t have to deal with “self-blame” an integral part of regret theory. This also works for FOBO, although deeper lying commitment issues never really have a quick-fix solution to begin with.
Now I do have to be honest in saying that in the past articles I’ve kept the objective quite simple: buying a phone, surround sound system or something else technological. I did this on purpose. The markets in which these products are sold are highly dynamic, but they are also quite transparent. You can read a lot about the products in question, both from their vendor and comparator sites where experts, professionals or enthusiasts do all the research for you. The chance of regret, however, is quite high still, because these markets continuously update. Bit of a mixed bag really.
Now there are markets that do not update as quickly, as a result it is easier to research them. The housing market is a good example. Houses don’t really get pumped out like phones do (unfortunately…). There prices are also a lot less transparent for their “specs”. It’s expensive to live in central London, definitely, but is a one-bedroom apartment really worth that price? Maybe to a Russian oligarch, but not to me. So this market is slower, so you can do more research as to what’s out there. However, it is a lot less transparent and more subjective in valuation, as a result, it’s yet another tricky market which means the chances of regret are really quite high – especially if you’re looking for a home and not just a house (e.g. investment property).
Other interesting markets from the perspective of regret theory are those that do not offer tangible products, but services. Think of the insurance market. That is a service that costs money, and is almost entirely valued at how much it costs on a monthly basis, pitted against how much it would cover you for. I have no scientific reference here, but I have a feeling that regret in these markets is much lower. I do not know whether this has something to do with the tangibility of the good or with the ease of switching and its negligible switching costs as compared to having to buy yet another phone, or even house!
Moving to a completely different market: how about dating? Many a market is a lot less messy than this one! Most people don’t have a clear idea of their WTP and WTA when it comes to this market. And if you don’t know what you want to begin with, you can’t really regret what you end up with, if you assume that regret is the difference between your expectations and your reality. But I’m not exactly an expert on dating, so I’ll leave this topic alone. If you want to read a great article on dating like a game theorist, make sure to read it here.
I hope you enjoyed this article I’ve written as an addition to the previous article on satisficing. Next week there’ll be an article on the PhD (reviewing my final year) and after that I’m linking satisficing, FOBO and regret theory to choosing default options, and how this is hampering innovation!