Transitive Regret

Often, preferences are driven by comparisons with choices not made. Preferences of a decision-maker over a set of options may arise from regret, i.e., from comparisons with alternatives forgone by the decision maker. This is natural when the decision maker has to choose between two options with random outcomes. Once the uncertainty is resolved he will know what outcome he received, but also what outcome he could have received had he chosen the alternative option. This ex ante comparison may cause him regret if his actual outcome is worse than the alternative. We ask whether regret-driven behavior is consistent with non-expected utility theories of choice. We show that the answer is no — such behavior is inconsistent with the assumption that preferences are transitive. If choices are made so as to minimize ex ante regret then preferences must be intransitive. —————————— Anderson School of Management, UCLA Department of Economics, Boston College