Gareth James: Regrets, I’ve had a few…..

Gareth James reflects on the difference between regret and disappointment and warns drawdown investment pathways could be an experiment the FCA comes to regret...

As someone who enjoys broadening my musical horizons, I’ve been a bit of a latecomer in recent months to the Spotify Discover Weekly function.

You have to be prepared to put up with the odd duff tune, but you’re often presented with songs you otherwise wouldn’t have chosen yourself.

A recent example was Edith Piaf’s classic song, “Non, je ne regrette rien”, which cropped up while I was out for a local walk.

It’s probably not a song that would lead many people to start thinking about regret and disappointment’s roles in pensions saving, but by the end of my walk, that’s what was playing around in my head!

A quick trawl through the internet highlighted a number of papers and articles on this topic, with the most relevant and interesting being an academic paper by Marcel Zeelenberg, a professor of economic psychology, titled “On bad decisions and disconfirmed expectancies: The psychology of regret and disappointment.”

A brief summary of the paper is challenging, but put simply, although the two emotions are seen by many as broadly the same, there are key differences.  Regret is evidentially associated with actions over which an individual had control or choice. Whereas disappointment is more typically associated with events which were beyond the control of the individual, meaning they had little or no control.

Individuals react differently when feeling emotions of regret or disappointment. Regret was seen to be a more amplified emotion, making individuals more likely to try to reverse the action they’d taken. Rather than taking action, those feeling disappointment at the results of events outside their control tended to distance themselves from any goals they may have set to reduce the negative feelings of disappointment.

Finally, individuals were seen to anticipate the possibility of regret or disappointment and take different steps to lessen the impact of each emotion. Those anticipating regret tended to delay making a decision, often to enable themselves to make it on a better-informed basis, whereas those anticipating disappointment reduced their expectations or made them less specific.

The right path

Reading the full paper is recommended as this topic struck me as having relevance to the emotions felt by clients in response to the services offered by financial planners.

It also struck me as interesting in the context of the design of drawdown investment pathways.

The pathways are based around a requirement for savers to make an active choice about what they want to do with their drawdown fund over the next five years. In the context of the research, this is more likely to lead to the more extreme feelings of regret than, say, the choice-free design of default investment under automatic enrolment. The latter being more likely to lead to disappointment if financial performance is poor, rather than regret.

Bearing in mind the volatility of financial markets over the last few months, and the differing behavioural impacts of the emotions of regret and disappointment, the introduction of a policy which some savers will perceive as having forced them to make one or more investment choices at the point of entering drawdown is an interesting psychological experiment on the part of the Financial Conduct Authority (FCA).

If the emotional response of regretful savers is to take panicked corrective actions, let’s hope it’s not an experiment the FCA itself comes to regret.

Gareth James is head of technical at AJ Bell