Financial decision-making is rarely a matter of cold, hard math. When real money is at stake, two very different emotions usually come into play. The first is the fear of losing what you already have. The second is the nagging feeling that an alternative choice would have yielded better results.
For decades, these two feelings existed in separate frameworks. Loss aversion belonged to one school of thought, regret to another, and they rarely sat at the same table.
New research conducted at Penn State University argues that the wall between them was never perfect. As it turns out, both forces can simultaneously influence the same decision. The study’s findings were published in the Journal of Risk and Uncertainty.
Prospect theory came first, introduced by Daniel Kahneman and Amos Tversky back in 1979. Its main thesis is crystal clear: losses cause more pain than equivalent gains bring pleasure.
Soon after, regret theory emerged, developed by Graham Loomes, Robert Sugden, and David Bell. It holds that people also brace for the pain of realizing that a rejected option could have led to success.
Over the years, both ideas have amassed compelling evidence. However, almost no one has tested how they might work together in a single mind, at the same time.
To distinguish between these two approaches, the team conducted a laboratory experiment with incentive-based tasks. A total of 228 people took part across thirteen sessions.
Each participant was shown pairs of winning combinations displayed as two spinning wheels. Each wheel was divided to show potential payouts and the probability of each outcome.
Each pair of players picked one wheel, and the result affected their daily earnings. Everyone started with a reserve of 350 points, since some spins could result in a loss. Points were exchanged for cash at a rate of 50 points per dollar. Most left with around 23 dollars, plus a 10-dollar participation fee.
In each pair, one risky bet always carried a chance of losing money. Its competitor also started with risky bets, then over fifteen rounds, shifted to safer options until only gains remained.
This gradual shift allowed the team to pinpoint the moment when behavior changed. Under loss aversion, people should hesitate around the point where the safer option no longer posed a threat of loss.
The main challenge lay in what each participant learned afterward. Three distinct conditions determined the amount of information received.
In the first scenario, people made a choice but saw nothing about how the story ended. Without the ability to compare outcomes, there was no room for regret over the unchosen path. In the second scenario, they watched their selected wheel spin and stop but never saw the other one. In the third scenario, both wheels spun, clearly showing what was won and what was missed.
In the no-information version, behavior strictly matched loss aversion. People clung to the riskier game whenever the alternative could still result in a loss.
The pull was astonishingly strong. The likelihood of sticking with the first choice was 3.28 times higher than the probability that the second choice would involve any losses.
The prospect theory model fit this pattern far better than the standard economic model. The math even approached the classic benchmark, showing a loss aversion coefficient close to the well-known estimate of 2.25.
Everything changed the moment people saw what they had missed. Once both wheels became visible, choices no longer aligned with loss aversion alone. Regret became real and statistically significant. It wasn’t the loudest voice in the room, but it was there, influencing choices in a way that the old single-factor model couldn’t explain.
When only the chosen wheel was shown, people began to fear risks that might later reveal a better path. The likelihood of taking such a risk was about 82 percent lower compared to the full-information scenario.
Still, across all comparisons, fear of loss played a more important role. Regret influenced decisions, but loss aversion shaped them. The gender difference in this pattern was minor. Women tended to be more regret-averse and generally showed greater loss aversion.
Men, on the other hand, leaned toward what the authors call rejoicing—satisfaction from having avoided a worse outcome. This was most pronounced in men who approached the task fresh, without prior experience.
The authors are cautious on this point. Gender was never a design goal, so these signals should be seen as narrow hints rather than verdicts on how men and women handle money.
Experience also mattered. People who had already played a round without information became more prone to regret when results appeared, while newcomers relied more heavily on plain fear of loss.
The useful part is precisely this variability. The tendency to avoid loss remained relatively stable as conditions changed, while feelings of regret shifted depending on experience and available information.
Practical implications range from insurance and investments to salary negotiations and job offers. The ability to see the consequences of rejecting an option can influence people’s initial decisions.
Models that rely on only one of these forces risk misinterpreting human behavior under uncertainty. The authors suggest that both the fear of loss and the pain of missed opportunities deserve attention in such decision-making.
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