Breaking Up Is Hard to Do

What happens to investors when they are racked with regret? Most people don't panic; instead, they freeze. To understand that paralysis, consider this example:
Paul owns shares in Company A. During the past year he considered switching to stock in Company B, but he decided against it. He now finds that he would have been better off by $2,500 if he had switched to the stock of Company B.
George owned shares in Company B. During the past year he switched to stock in Company A. He now finds that he would have been better off by $2,500 if he had kept his stock in Company B.
Who feels worse? In surveys, an overwhelming 92% of people say George feels more regret than Paul. Almost everyone shares the same powerful intuition: In the here and now, a mistake that stems from an action hurts worse than a mistake that results from inaction. "You were at the secure trunk of the tree," says psychologist Thomas Gilovich of Cornell University, "and then you went out on a limb, and when it gives way you feel like a fool because you didn't need to go out on that limb." And that's why errors so often paralyze investors. After you screw up once, you become afraid of taking another action that could make things even worse. And the only thing worse than losing is having to admit that you're a loser. So, while most investors are only too eager to cash in on their gains, they hate to sell an investment when it's down, since selling turns a "paper loss" into a real one.