Regret Minimization
You'd like certainty; you can't have it. Regret minimization is the next best thing.
What Is Regret Minimization
When considering an important financial decision, it's not uncommon to get caught in "analysis paralysis". Every decision usually has multiple pros and cons, and trying to holistically consider the qualitative and quantitative factors for each side can be a challenge. Individuals can proverbially "lose sight of the forest for the trees".
For major decisions, careful consideration of the key pros and cons is definitely needed. But once you've done that, a mental framework we frequently use with clients (with strong results) is focusing on regret minimization. In simple terms, we ask "If we simplified this down to a Yes/No decision; which outcome would give you more regret?"
It's not a panacea, and decisions in financial planning are rarely binary. But breaking the problem down into a binary outcome and framing it in terms of regret minimization frequently helps point us in the right direction. And, thereafter, energy can be focused on refining the details for the selected (lower regret) path.
How Regret Minimization Applies to Stock Comp
Making key decisions regarding stock-based-compensation is one of the primary times we utilize regret minimization with our clients. As noted previously, stock comp tends to follow an 80/20 rule and you can get a long way towards developing a plan by focusing on a few key things. For example, two of the major stock-comp questions we frequently work through with clients are: (1) Should I exercise some/all of my options (or not)? and (2) Should I sell some/all of my stock and/or options (or not)?
In both of these situations, regret minimization frequently helps us get to the root of an individual's thinking, and once we have a general direction we can refine a strategy that works best for them. For example, for the two questions above, the typical question we ask a clients is:
Key Question/Focus | Regret Minimization Framing |
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Should I exercise some/all of my options (or not)? | Which of these two outcomes would make you regret more?
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Should I sell some/all of my stock and/or options (or not)? | Which of these two outcomes would make you regret more?
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Regret Minimization in Other Financial Planning Vectors
While stock-based-compensation is the vertical in which we most frequently deploy regret minimization framing for clients, we use it in more than a handful of other financial planning vectors as well. When we use, why we use, and what question we're breaking down into a binary outcome all depends on an individuals specific situation and circumstances. But a few examples are:
Key Question/Focus | Regret Minimization Framing |
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Primary home purchase decisioning | Which of these two outcomes would make you regret more?
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Spending more today vs. saving more for the future | Which of these two outcomes would make you regret more?
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Taking on too much debt | Which of these two outcomes would make you regret more?
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Not having proper insurance coverage | Which of these two outcomes would make you regret more?
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