No Regrets? It’s Possible If You Think About Risks, Not Results

source: andy_c via flickr

Earlier this week my car was low on gas, and I pulled into the first station I could find. I filled up the tank, thinking prices would be on the rise.

The next day I received an unpleasant surprise. Gas prices dropped about ten cents per gallon. I clearly overpaid by a few dollars. How was I supposed to feel?

Ten years ago I would have been furious. I used to hate when gas prices went down after I filled up, or when an item went on clearance after I bought it. Like most people, I’ve spent many hours complaining and feeling stupid about wasting money. Looking back, I should have lightened up.

Most of us are too critical of our decisions

We think we’re supposed to make the best decision all the time. In fact, most of us do a pretty good job of comparison shopping, talking to friends, and networking to find the best deal. But even then, most of us feel regret when we fail.

Hindsight is too tough on our decisions. We think about the stock we didn’t invest in, the job we didn’t take, or the property that has never lived up to its potential.

We lose sight of the good things we do that avoid mistakes. It’s easy to forget that a seatbelt provides safety if you never get into a collision. It is certainly not a waste to be over protected at a low cost.

So what’s wrong with our conventional thinking?

Our main mistake is judging decisions based on results

In this logic, a bad result means a bad decision, or a good result means a good decision. The very same decision can be seen in two different lights, depending on the outcome. For instance, the winner of a lottery is praised for having made a good decision while the millions of losers are lumped as having made bad decisions.

Such logic is absurd, but it appears in many places. Just the other day I listened to sports writers discussing Tiger Woods. He played the US Open on a bad knee, won the tournament in dramatic style, but then needed season-ending surgery. This was a huge blow, and the sports writers debated whether Tiger made the right choice to play. Most of them ultimately decided it was a good decision because he won.

But what if he had lost–would that have meant the decision to play was bad? Again, this thinking is absurd. It was risky for him to play, regardless of whether he won or lost. The only relevant factor is Tiger Wood’s assessment of risk, and that’s something only he can decide. Understanding that is the key to making better decisions systematically.

We should instead be making decisions based on risk

Risk is the relevant factor. Decisions are about considering likely and unlikely outcomes and making a sensible choice. No matter what decision you make, there will always be times when it looks bad in hindsight.

Take the decision to buy health insurance, for instance. I hear many young people say they don’t insure because they don’t think they’ll need it. It would be a waste for a healthy person to buy it, they think.

This mindset is so common that even comedian Chris Rock expresses it:

They shouldn’t even call it insurance.
They just should call it “in case [of bad things].”

I give a company some money
in case [bad stuff] happens.

Now, if [bad things] don’t happen,
shouldn’t I get my money back?

Besides not making economic sense, such thinking mistakenly focuses on outcomes of health or sickness rather than the uncertainty and risks. The reality is that health is unpredictable, and insurance helps smooth the costs. It’s the risks, not the results, that matter.

Think about it. You should be happy to waste insurance premiums because that would mean you were fortunate to be healthy. It is analogous to wearing a seatbelt and driving the speed limit your whole life and never getting into a car crash.

But I don’t mean to single out health insurance. Thinking about risks rather than results is useful for almost every problem because life involves randomness.

Here are some areas where you should think about risks, not results:

• buying any kind of insurance (risks: catastrophic loss, foreseeable costs)
• speeding on the highway (risks: getting a ticket, crashing into another car)
• investing in a stock (risks: inflation, loss of investment)
• home-ownership versus renting (risks: flexibility, housing market changes)
• choosing a job (risks: stability of employment, lifestyle changes)

Judge the risks, make a call, and then let the dice roll as they may.

No regrets.