Original text from Felipe Montealegre
Compiled by Odaily Planet Daily Golem（@web3_golem）
While economic research focuses on rational agents making optimal decisions and reaching precise equilibria, algorithmic game theory seeks to understand whether humans following simple rules can make decisions close to optimal. The "regret minimization" process can help us understand when and how simple rules can lead to near-optimal decisions.
It turns out that if humans "torture" themselves with regret after making mistakes, they become better at decision-making. Anyone who has learned a new skill can observe this process. When you play Catan (Odaily note: a multi-player strategic board game), you think about why you shouldn't focus on sheep, as wool prices inevitably drop as the game moves into the city-building phase; when you play tennis, you learn not to go for the winning backhand, especially when you're tired. This knowledge accumulates through the regret minimization process, making your game closer and closer to the effective boundary of your abilities.
We are in a raging bull market, and many people wake up every morning regretting themselves, as they see a token they didn't hold surge 150% or even 1500% at times. Perhaps last week, a good friend of yours recommended it to you, and you even saved multiple posts about it. You may have seen it on TikTok and thought, "I can understand why young people would like this kind of thing." So is your regret a healthy regret minimization work that can make you a better investor, or should you be more meticulous in self-flagellation?
Three Types of Regret
There are three types of regret, and you should handle each type of regret differently in the regret minimization process.
External Regret
External regret means you feel you made the wrong choice in hindsight. Like in a poker game, you have pocket aces and choose to go all-in, but the person next to you ends up hitting a full house (Odaily note: three cards of the same rank, which beats a pair) on the river; or when you go to a nearby Chinese restaurant but find it's not as good as you expected, you'll feel external regret, as you should have gone to the other restaurant you had in mind, but you couldn't have known that in advance.
As a fundamental investor, when you miss out on XRP, you'll also feel external regret. Didn't it feel great to make 5x returns in 15 days? In hindsight, external regret is a poor way to learn. In a probabilistic world, anything can happen, and you can't regret missing opportunities every time, or you'll abandon the discipline built around a sustainable, well-thought-out investment philosophy.
Swap Regret
The real issue is not whether you should have bought XRP, but whether you should change the trading principles that led you not to buy XRP. This is where swap regret comes in.
Swap regret means you regret the rules you've been following and want to replace them with better rules. When you're playing poker, even though there are already two aces on the table, you still bet big on your 7 and 4, simply because you're tired of folding all the time - this is swap regret. You've been following the "bet big when bored" rule, and you have good reason to swap this suboptimal rule for some other thoughtful rules about optimal poker play.
When Warren Buffett shifted from "cigar butt investing" to compounding investing, he was learning swap regret, replacing one rule (buying relatively cheap assets) with another better rule (buying growth companies with strong moats). In the external regret example, unless you decide to change the rule "I'll try new restaurants" to "I'll only stick to restaurants I already like," you won't feel swap regret in the Chinese restaurant example. Swap regret is a great way to learn - you constantly examine the rules you follow when making decisions and ask yourself if there's a rule that could lead to better outcomes.
If you want to do proper regret minimization on XRP, you need to ask yourself if there's a better rule that would have led you to make the purchase decision. Potential choices could include - "When an old friend texts me saying a token is about to skyrocket, I should buy it" and "I should buy tokens that are seeing rapid growth on TikTok." Many people are trying this type of swap regret learning right now.
I really can't think of a good rule that would fit into my investment philosophy and lead me to invest in XRP, so I don't regret missing it. You can only feel swap regret when you're willing to change the rules that govern your behavior.
Internal Regret
Swap regret is the core concept, and internal regret is relatively easy to understand.
Internal regret means you didn't execute your own rules well. When you're a "paper hand" - selling SOL at the bottom, even though you previously told yourself you're a contrarian investor willing to hold through major pullbacks, you'll feel internal regret. Drew Gulak knew this was a mistake when he bought at the top of the 2001 tech bubble, even though he was aware of it at the time. You should mercilessly self-flagellate over internal regret and learn some of your own trading discipline.
