People make financial decisions not simply by weighing potential risks against expected returns, but also by trying to avoid losing money and experiencing regret, according to new research led by Lisa Posey, associate professor of risk management in the Penn State Smeal College of Business. Published in the Journal of Risk and Uncertainty, the study challenges the long-standing economic assumption that people act primarily to maximise financial gains. Instead, the findings suggest that emotions play a central role in shaping investment and spending decisions. The researchers found that loss aversion and regret aversion often work together, providing a more realistic explanation of how people make financial choices than traditional risk-return models alone.

To investigate these behaviours, the research team recruited 228 participants, giving each person $17 to take part in a series of gambling experiments. Participants repeatedly chose between two gambles with different combinations of potential gains and losses. One gamble remained unchanged throughout the experiment, while the alternative gradually became more attractive by offering smaller losses and larger gains. Participants had a 75% chance of receiving the better outcome from their chosen gamble and a 25% chance of receiving the lower outcome. They were not told the results after each round, allowing researchers to isolate the effect of potential loss on decision-making.

The results showed that participants were eager to switch to the second option as soon as it no longer carried any possibility of losing money, even though waiting longer would have produced a more profitable opportunity. Rather than focusing solely on maximising returns, many people preferred the certainty of avoiding losses. Across the study, participants were 10 percentage points more likely to reject a gamble if it included any chance of losing money than if it guaranteed no loss. Women demonstrated an even stronger tendency toward loss avoidance, being 15 percentage points more likely than average to avoid potential losses, compared with an eight-percentage-point increase among men.

The researchers also examined how regret influences financial decisions. Participants completed two additional versions of the experiment. In one, they learned only the outcome of the gamble they selected. In the other, they also saw what would have happened had they chosen the alternative option. When participants could compare both outcomes, every decision carried the possibility of regret if the unchosen option produced a better result. When only the selected outcome was revealed, regret was limited because participants could not determine whether the alternative would have been more rewarding.

Women were six percentage points more likely to alter their decisions to avoid future regret, while men’s choices were largely unaffected by this factor. Posey explained that someone choosing between two investments might be satisfied with earning a profit, but still regret their decision if they later discovered the alternative investment performed even better. Anticipating those feelings influenced future choices. Because participants were simultaneously trying to avoid both financial losses and emotional regret, their decisions often differed substantially from those predicted by conventional economic theories.

The findings have practical implications for businesses, financial institutions and policymakers seeking to influence consumer behaviour. Companies that market insurance, investment products or retirement savings plans may be more successful if they recognise that customers are motivated not only by potential returns but also by their desire to avoid losses and regret. Posey added that these psychological forces likely extend beyond financial decisions, shaping everyday choices ranging from selecting investments to choosing careers, homes or even romantic partners. Understanding how people balance financial outcomes with emotional consequences may help organisations design products, services and policies that better reflect real human behaviour.

More information: Lisa Posey et al, The coexistence of loss aversion and regret aversion in decision making under risk, Journal of Risk and Uncertainty. DOI: 10.1007/s11166-026-09476-y

Journal information: Journal of Risk and Uncertainty Provided by Penn State