Regret Minimization: Jeff Bezos' Method for Bitcoin Decisions

Regret minimization means making a big decision so that, at 80, you regret it the least. In 1994 Jeff Bezos used it to decide to leave a well-paid job for an online bookshop. Applied to Bitcoin, the method answers two questions well: how much to buy and when to sell. But it only works with one condition that Bezos took for granted: failure has to be survivable.

The thinking errors that cost investors money in general are collected in Cognitive Biases in Bitcoin Investing. This article is about one single way of thinking and how to apply it to Bitcoin without outwitting yourself.

What Jeff Bezos decided in 1994

In 1994 Jeff Bezos was 30 and a senior vice president at the hedge fund D. E. Shaw in New York. He had read that internet use was growing by more than 2’000 % a year and wanted to start a bookshop on the web. His boss David Shaw took him for a walk in Central Park and said, in essence: good idea, but better suited to someone who doesn't already have a good job. He asked him to think about it for 48 hours. Leaving mid-year also meant giving up the annual bonus.

In a 2001 interview with the Academy of Achievement, Bezos described how he decided:

"I wanted to project myself forward to age 80 and say, 'Okay, now I'm looking back on my life. I want to have minimized the number of regrets I have.' I knew that when I was 80 I was not going to regret having tried this. […] I knew that if I failed I wouldn't regret that, but I knew the one thing I might regret is not ever having tried."

He called it his regret minimization framework. In July 1994 he founded, in Bellevue near Seattle, the company that became Amazon.

Two things in the story are often overlooked. First, Bezos had savings, a Princeton degree and a CV that would have got him a good job again at any time. Failure would have been unpleasant for him, but not ruinous. Second, he applied the method to a single big life decision, not to every everyday question.

The regret minimization framework in three steps

The method comes down to three steps:

1. Change your vantage point. Imagine you are 80 and looking back. What counts is not today but your whole life.
2. Play out both paths. For each option, ask: if it goes well, how does that feel? If it goes badly, would I regret the decision, or only the outcome?
3. Choose the path with the least regret. Not the one with the biggest possible gain and not the one with the smallest risk, but the one you can best live with in hindsight.

The difference between "regretting the decision" and "being sorry about the outcome" is the core. If you put a reasonable amount into Bitcoin after careful thought and Bitcoin fails, you are sorry about the loss. You need not regret the decision, because it was sensible with what you knew at the time.

Why regret changes sides over the years

That the view from your 80th birthday shows something different from the view today is well documented. In 1995 the psychologists Thomas Gilovich and Victoria Husted Medvec summarised what people regret over different time spans:

• In the short run people tend to regret actions: the purchase that immediately went into the red, the message they shouldn't have sent.
• In the long run they tend to regret inactions: the education they never pursued, the chance they didn't take.

For Bitcoin this means: buying just before a crash hurts a lot in the weeks that follow. Someone who says "next month" for years and never buys hardly feels it, until they look back years later. What that looked like in numbers is shown in Finding the Right Time to Buy: after one year almost one in three start days since 2011 was at a loss, after four years none.

Short-term regret is loud, long-term regret is quiet. Regret minimization is essentially an attempt to hear the quiet voice in time.

How much Bitcoin? Regret minimization when buying

Say you have €100’000 and are wondering what share to put into Bitcoin. To keep the arithmetic clear, we play out only two worlds over 15 years: Bitcoin fails and loses 90 %, or Bitcoin rises tenfold. The rest of your wealth keeps the same value in both worlds. This is not a forecast, but a tool to make the two kinds of regret visible.

The last two columns measure regret: how much less do you end up with than with the choice that turns out best in hindsight? At 0 %, in the good world you miss 90 % of what was possible. At 100 %, in the bad world you miss 90 %.

A strict minimax-regret calculation would now pick 50 %, because that is where the larger of the two regrets is smallest. The Nobel laureate Harry Markowitz, founder of modern portfolio theory, told a similar story about his own retirement savings: instead of applying his theory, he split his money half into shares, half into bonds, because he pictured the regret in both directions.

The limit: regret you can afford

Here is the trap. The table measures regret as a percentage of what was possible. Your life measures it differently: €45’000 less because Bitcoin failed can mean the deposit for the flat is missing or the emergency fund is gone. €450’000 less because you bought too little means you didn't get rich. Annoying, but your life goes on as planned.

That is exactly the distinction Bezos made when he said he wouldn't regret failing. He could afford it. Applied to Bitcoin, regret minimization has two stages.

1. Exclude first: Any share whose failure you would regret at 80 because it would have done you real harm is out. Bitcoin fell 77 to 93 % in every major bear market. The share at which such a crash doesn't throw you off course is your upper limit. How to find it with a simple crash test is in Bitcoin Share in Your Portfolio.
2. Then minimise: Among the remaining shares, pick the one where you would least regret not acting. That is usually the highest share that still passes the test, not a much smaller one chosen out of mere unease.

When to buy, all at once or spread out, is a separate question. Regret logic helps here too: a savings plan halves both kinds of regret, because you never buy everything at the top and never everything at the bottom. The numbers are in Savings Plan or Lump Sum.

Regret minimization when selling

When selling, most people think of only two kinds of regret: sold too early or too late. Both are covered in The Psychological Trap of Selling, and the answer there is: sell in steps, so you are partly right in every scenario.

The view from your 80th birthday adds a third regret that hardly any holder thinks about: never having used the money. The energy trader and hedge fund manager Bill Perkins devoted a whole book to it in 2020, "Die With Zero". His thesis: many people save and grow their wealth so diligently that they spend it too late or never on what it was meant for. A trip at 40 cannot be made up for in the same form at 75.

For Bitcoin holders this is a real danger, because the culture celebrates holding. If you decided in 2017 to "never sell" while having a goal such as buying a home in mind, ask yourself whether the goal still stands or whether holding itself has become the goal.

Three questions help with every sale:

• Would I regret at 80 having sold this part? For a small part for a fixed goal, hardly ever.
• Would I regret at 80 having kept it? If it means giving up something important, quite possibly.
• Would I regret the decision, or only the price afterwards? You can't control the price afterwards. You can control the decision.

How to turn this into fixed rules, with a core holding, a selling holding and taxes in Germany, Austria and Switzerland, is shown in How to Build a Bitcoin Exit Plan.

When regret minimization leads you astray

The method is strong, but it has weak spots. Bitcoin holders meet four of them again and again.

FOMO in disguise. "I would regret not having been part of it" is exactly the sentence with which people put all their savings in after a 300 % rise. That isn't regret minimization but fear of missing out. The difference: real regret minimization always also asks whether you could cope with failure. How the cycle of greed and fear plays out is described in FOMO, Panic and Capitulation.

The past as the future. When you picture the 80-year-old, you often unconsciously picture Bitcoin continuing to rise as it has. The regret of not buying then looks huge. So explicitly play out the world in which Bitcoin fails too, as in the table above.

Survivors tell the story. Bezos told his method in hindsight, when Amazon was long a success. You rarely hear from the many who gave up a safe job for an internet start-up in 1994 and failed. That doesn't make the method wrong, but it means it promises no success, only a decision you can live with.

Applied too often. If you ask yourself every week whether you will regret today's purchase at 80, you become nervous rather than calm. The method belongs to the few big decisions: getting in, the share, the exit plan. After that, the plan takes over.

The age-80 test for your Bitcoin decision

This is how to apply the method in half an hour. Take paper and write down the answers, because in your head you'll gloss over them.

1. Write the decision as a sentence. For example: "I invest 15 % of my wealth in Bitcoin and buy €300 more every month."
2. Write down the worst world. Bitcoin falls 80 % and stays down for three years. What changes in your life? Do you have to give up something that matters to you?
3. Write down the good world. Bitcoin rises tenfold in 15 years. How does your share today feel then?
4. Check the limit. If step 2 shows real harm, lower the share until it disappears.
5. Ask the 80-year-old. Which decision can they live with in both worlds? That is your answer.
6. Set a goal. What is the money for in the end? A concrete goal in euros or francs protects you from the third regret, never having used it. You can record and calculate it in My Goal.