Research shows that when humans make mistakes, if they can reflect on their behavior through "regret," they will gradually improve their decision-making abilities.

Author: Felipe Montealegre (IFS)

Translation: Deep Tide TechFlow

If you're really that smart, why did you miss out on XRP? Discussing Regret-Minimization in a Volatile Market.

Traditional economics studies how rational actors make optimal decisions and reach equilibrium, while Algorithmic Game Theory attempts to answer a more realistic question: can humans, by following simple rules, approach or even mimic the effects of optimal decision-making? Regret-Minimization Dynamics is an important research direction that helps us understand when and how simple rules can converge towards optimal decisions.

Research indicates that when humans make mistakes, if they can reflect on their behavior through "regret," they will gradually enhance their decision-making abilities. Anyone learning a new skill can relate to this: for instance, when playing Catan, you might reflect that you shouldn't have focused too much on sheep, as the price of wool will inevitably drop as the game progresses to city building; or when playing tennis, you learn not to attempt a winning shot with a backhand when you're fatigued. These experiences accumulate through regret, gradually refining your performance to approach the efficient frontier of your abilities.

Currently, we are in a frenzied bull market, and every morning, when you see a certain "out-of-pocket token™" rise by 150% or even 1500%, you might find yourself torturing yourself with regret. Perhaps a friend recommended this token to you last week, you saved related posts, and even saw it on TikTok, thinking, "Young people might like this." So, is this regret a healthy reflective process that will make you a better investor, or is it an unnecessary self-torture?

To answer this question, we need to distinguish between three different types of regret and adopt different coping strategies.

External Regret refers to the realization that you made a wrong choice after the fact. For example, in Texas Hold'em, you go all-in with a pair of pocket Aces, but your opponent hits a Full House on the river. Or, you try a newly opened Chinese restaurant only to find the food isn't good, while you could have ordered takeout from Dim Sum Palace. As a fundamental investor, when you miss out on XRP's surge, you also feel external regret. After all, from a profit perspective, seizing a 5x opportunity in 15 days is certainly worth it. However, external regret is not a good learning method because, in a world filled with uncertainty, anything can happen. If you feel regret for every missed opportunity, you will gradually lose confidence and discipline in a lasting and logical investment philosophy.

Therefore, the real question to consider is not "Should I have bought XRP?" but rather "Should I adjust the investment rules that led me not to buy XRP?" This is the crux of Swap Regret.

Swap Regret refers to the regret you feel about a rule you followed and your desire to replace it with a better one. For instance, in a poker game, you might go all-in with a 7-4 just because you're tired of folding, even though there are already two Aces on the table; at that moment, you would feel swap regret. You followed the rule of "bet big when bored," which is clearly a suboptimal rule. You have every reason to replace it with a more rational poker strategy rule, such as "bet according to the odds."

Similarly, when Warren Buffett shifted from the "cigar butt investing" approach to investing in "compound growth companies," he was actually experiencing swap regret. He abandoned the rule of "buying relatively undervalued assets" in favor of a better rule: "investing in companies with strong moats, high capital returns, and sustained growth." This shift reflects his process of learning from past investment experiences and continuously optimizing decision rules.

In the previously mentioned Chinese restaurant example, unless you decide to change the rule "I will try new restaurants" to "only go to restaurants I already like," you won't feel swap regret. The essence of swap regret lies in reflecting on and optimizing rules. It prompts you to continually examine the rules you follow in decision-making and ask yourself if there is a rule that could yield better results.

If you want to truly minimize regret over missing XRP, you need to ask yourself if there is a better rule that could have led you to make the correct investment decision at that time. For example, potential rules might include: "Whenever an old friend texts me about a token going 'to the moon,' I should buy it" or "I should buy those tokens that are rapidly growing on TikTok." In fact, I've seen many people trying to improve their investment rules through this method of swap regret.

But for me, there is no rule in my investment philosophy, even one that slightly aligns with my beliefs, that would have allowed me to seize the investment opportunity in XRP. Therefore, I do not regret missing it. You only have reason to feel swap regret when you are willing to change the rules that govern your behavior.

Swap regret is the core concept, while Internal Regret is relatively easy to understand.

Internal Regret refers to not executing your rules well. For instance, you tell yourself you will be a contrarian investor, willing to hold during significant market downturns, but you sell at the bottom of SOL due to "paper hands," ultimately feeling internal regret. Similarly, the famous investor Druckenmiller bought at the peak of the tech stock bubble in 2001, even though he knew it was a mistake at the time, and later felt deep internal regret.

For internal regret, you should clearly "torture" yourself, learn from it, and cultivate discipline. Only by continuously reinforcing the execution of your rules can you avoid making similar mistakes in the future.

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