I recently met a person who regrets investing in a fixed deposit! He has a case for his remorse. He postponed a dream vacation last year and invested in a one-year bank deposit.

And now, he regrets not taking the vacation for various reasons. Both classical and behavioural economics can explain his remorse. How?

Consider first the classical argument. The rupee depreciated against the dollar, making his vacation 15 per cent more expensive this year.

Unfortunately, his bank deposit fetched him an interest rate of only 8.5 per cent. Postponing his dream vacation, hence, turned costlier.

Now, consider the behavioural argument.

We always like to indulge today and adopt strict measures in the future - one reason why we overeat today and prefer to diet from tomorrow!

But how would you feel if you adopted strict measures today in anticipation of enjoying sometime in the future?

Behavioural economists have conducted several experiments in this area to capture our reactions. In one such experiment, students at a certain business school expressed remorse, rather than delight, for working during their term breaks! Why?

HYPEROPIA EFFECT

Working during their term breaks gave them money but forced them to stay away from parties - something they won't be able to enjoy after student life.

Thus, working seemed right at that time but led to a feeling of regret when these students later reflected on their decision!

The case is no different with consumers.

Many regret being “cheap” and not indulging during a sale, well after the sale is over. Such behaviour is called hyperopia. The term, which is the opposite of myopia, is so called because it comes from people looking too far into the future while sacrificing the present.

Saver's remorse is a term used by behavioural economists to capture the hyperopia effect.

Saver's remorse does not, of course, mean that you should not save today, postponing your current consumption!

It simply reminds you to have a right balance between consuming today and consuming in the future.

(The author is the founder of Navera Consulting. He can be reached at >enhancek@gmail.com )

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