Please forward this error screen to 108. Maximizing gains is fine, but minimizing regrets counts for a lot too. Sell art for bitcoin decision makers to a dynamic network of information, people and ideas, Bloomberg quickly and accurately delivers business and financial information, news and insight around the world.
What are you searching for? During any given week, I speak with all sorts of people who have capital at risk in markets. Most understand what they are investing in and why. Then there are the folks who own bitcoin. I have had conversations with folks who are now sitting on a huge financial windfall.
I have no opinion on crypto valuations. Rather, this is simply a framework for those fortunate folks who want an answer to the issue above. To do this, let’s consider an instructive war story: During the mid-1990s, a good friend took a senior job at a tech startup that came with a good salary — and lots of stock. The company got taken over in late 1996 by Yahoo! The shares in the startup were replaced with Yahoo stock options that had a six-year vesting schedule, with 25 percent vesting after three years and the balance vesting monthly during the next three years. For those who were trading then, these were heady times. Tech stocks, especially the dot-coms, galloped higher, doubling and tripling over short periods.
It seemed that every sale was a cause for regret, as stocks simply kept going up, up, up. My buddy’s stock options represented a great deal of wealth. Not merely fun money, but life-altering: pay off the mortgage and the car loans, pay for the kids’ colleges, fully fund retirement accounts, and still have lots left over. He could take any job he wanted for the rest of his life — or none at all. He was torn about what to do, and asked for some help. My advice was not based on the dot-com bubble or the valuation of Yahoo’s stock or anything market related. Rather, I suggested employing a regret minimization framework.
Although any investment has a range of possible outcomes, I wanted to focus on potential outliers at either end of the spectrum. How would you feel if either of these occurred? For my friend, it was an easy decision. If he sold some of his shares and the stock went higher, he still owned a healthy slug of options. Although he was happy with his decision, not everyone at Yahoo was so fortunate. Stories abounded of paper multimillionaires and even billionaires who saw much of their wealth evaporate in the subsequent collapse. For those bitcoin holders sitting on a windfall, they too can employ a similar regret minimization decision-making strategy.
If you are holding a life-changing pile of paper gains, consider the regrets of selling and bitcoin keeps going up, or not selling and it plunges. Which is the outcome you most want to avoid? Doing this accomplishes several things: First, it locks in sufficient wealth to eliminate a lot of life’s money-related worries. Second, it still leaves you with upside if this is only early innings and cryptocurrencies keep rising. That’s why we need to occasionally consider minimizing regrets. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. Regret theory traces its academic history to 1982, and was developed independently by numerous researchers, notably by Graham Loomes, Robert Sugden, David E.
Both were possible, but not exactly what the analyst consensus was at the time. This isn’t about loss aversion, but regret-decision theory. In theory, investment decisions are probabilistic exercises using imperfect information about an unknowable future. But that leaves out the human side of the equation.