Practical analysis for investment professionals
10 August 2012

Silver Medal or Bronze? Understanding Pride, Regret, and Counterfactual Thinking

There were plenty of stories of triumph and disappointment over the course of the London Olympics: Oscar Pistorius, a.k.a. “Blade Runner,” became the first double-amputee athlete to compete in track and field at the Olympics and Usain Bolt, once again proved he is king of the 100-meter sprint and the fastest man in the world. Lolo Jones, meanwhile, finished fourth in the 100-meter hurdles, missing out on a spot on the podium by just 0.10 seconds. But the story that really fascinated me was not about a particular athlete, event, or remarkable feat. It was a blog post on the psychology on display at the medal ceremony.

It turns out that if you look at the emotions shown by the silver and bronze medalists, as a team of researchers did following the 1992 Barcelona Olympics, the bronze medalists tend to be happier than the silver medalists. That may sound counterintuitive, but it has to do with something known in psychology circles as “counterfactual thinking,” or the tendency we all have to imagine alternatives to reality — the “what-ifs?” and “if onlys” that often accompany defining moments in our lives. Said another way, we are all inclined to ponder might have been if just one circumstance were different.

In a 2009 essay, “Counterfactual Investing,” Cabot Research noted that “Emotional responses to outcomes often are influenced by what might have been,” and counterfactual thinking often ends in regret. “The emotional response to an event depends on how easily one can conjure up alternate outcomes that are either better or worse,” the article said. “An often-cited example regards missing a flight by [five] minutes or by 45 minutes. People who just barely miss their flight tend to kick themselves more than those who missed their plane by a mile. The closer you were to making the flight, the easier it is to construct an alternative outcome or counterfactual that triggers regret.”

In their 1995 study, “When Less Is More: Counterfactual Thinking and Satisfaction among Olympic Medalists,” the researches attributed their results to the fact that the most compelling counterfactual alternative for the silver medalist is winning the gold, whereas for the bronze medalist it is finishing without a medal. In other words, the silver medalists think about how close they came to winning gold (but didn’t) whereas the bronze medalists think about how close they came to not medalling (but did — phew!). So the silver medalist compares him or herself to only one other athlete, the winner, whereas the bronze medalist compares him or herself to all the other competitors who didn’t place in the top three.

(As a comedic aside, Jerry Seinfeld explained Olympic medals and counterfactual thinking in one of his stand-up routines: “Think about it, you win the gold — you feel good. You win the bronze — you think, ‘Well, at least I got something.’ But when you win that silver it’s like, ‘Congratulations, you almost won. Of all the losers, you came in first of that group. You’re the number one loser. No one lost ahead of you!”)

The philosophical roots of counterfactual thinking can apparently be traced back to early philosophers such as Aristotle and Plato. And more than a century ago, psychologist William James noted: So we have the paradox of a man shamed to death because he is only the second pugilist or the second oarsman in the world. That he is able to beat the whole population of the globe minus one is nothing; he has ‘pitted’ himself to beat that one; and as long as he doesn’t do that nothing else counts.”

All this got me wondering whether counterfactual thinking could be applied to the world of investing and whether financial advisers could glean any insights from this area of research.

As it happens, a team of researchers recently published a study titled “Once Burned, Twice Shy: How Naïve Learning, Counterfactuals, and Regret Affect the Repurchase of Stocks Previously Sold.”

According to the authors, investors are one-half to two-thirds more likely to: (1) repurchase stocks previously sold for a gain rather than stocks they previously sold for a loss; (2) repurchase stocks that have lost rather than gained value following a prior sale; and (3) purchase additional shares of stocks that have lost rather than gained value since being purchased. All these behaviors were consistent with counterfactual thinking — looking back at what could have been — and investors’ desire to avoid regret and instead feel pride.

“Suppose you sell a stock for $100, trading later for $120. If you buy it back, you’re going to regret it because it’s now more expensive,” said Terrance Odean, professor of finance at the University of California’s Haas School of Business and a coauthor of the study, in a press release. “On the other hand, if it’s trading at $80, now you feel good because you timed it right. Investors choose what they buy and sell to some extent to manage their own emotions.” (Watch Prof Odean talk about his research.)

The researchers explained that an investor who sold for a gain had positive associations with investing in that stock and will repurchase it. If the price was higher than the level at which he had previously sold the stock, the investor would always anticipate regretting that it would have been better if he had never sold his investment. But an investor was more likely to re-buy a stock that was valued lower than when he sold for because it would make him feel happy and proud and that he sold at the right time.

While it makes emotional sense that investors would want to avoid stocks on which they’d previously been burned, counterfactual thinking doesn’t necessarily result in the soundest investment decisions. So, how can investors see past the emotional baggage of past trades? As with any cognitive bias, the key to seeing past counterfactual thinking it is to actively engage the reflective brain. Wall Street Journal investing columnist Jason Zweig has outlined some simple steps to help investors exercise the reflective brain and distance themselves from the emotions that may be driving their decisions.

Even for Olympic athletes, the key to success is clear thinking. As former Olympic athlete Bruce Jenner said, “You have to train your mind like you train your body.”


Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

About the Author(s)
Lauren Foster

Lauren Foster is a content director on the professional learning team at CFA Institute and host of the Take 15 Podcast. She is the former managing editor of Enterprising Investor and co-lead of CFA Institute’s Women in Investment Management initiative. Lauren spent nearly a decade on staff at the Financial Times as a reporter and editor based in the New York bureau, followed by freelance writing for Barron’s and the FT. Lauren holds a BA in political science from the University of Cape Town, and an MS in journalism from Columbia University.

5 thoughts on “Silver Medal or Bronze? Understanding Pride, Regret, and Counterfactual Thinking”

  1. scott abry says:

    Very fascinating article, great work.

  2. Dusan Stojanovic says:

    Another example of the dominance of the reptilian brain at work. Another popular reference is the 1999 Woody Allen movie “Sweet and Lowdown”, a biography of the fictional jazz guitarist portrayed by Sean Penn who regards himself the second greatest guitarist in the world.

  3. Great article and I love that Seinfeld clip!

  4. rick davies says:

    I am surprised how little attention is given to systematic counter-factual thinking in investment circles, relative to its use in other fields like project evaluation (my area). The references that are made above seem to focus on the potential negative effects of doing so. I think some of your readers might find it useful to try doing the following occasional analysis of a portfolio of stocks that have been bought and sold in a given period:
    1. Profit/loss on a,b, c,d,e, stocks if all bought and sold as actually happened
    2. Prodit/loss on a,b,c,d, e stocks if all bought as actually happened but not sold as actually happened
    3. Profit/loss on a,b,c,d,e stocks if none bought as actually happened and all bought as actually happened
    4. Profit/loss on a,b,c,d,e stocks if none bought or sold as actually happened

    The 2nd, 3rd and 4th analyses cover three different types of counterfactual,whose outcome can be compared to the outcome of the real event covered in the first analysis.

    My experience suggests that this can be a salutary experience, and for the time being this inclines me to trade less, not more. But perhaps in different market conditions this kind of counterfactual analysis might lead me in a different direction. Perhaps others could help us explore these possibilities…

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