The concept of utility in trading
It may seem weird to use the idea of utility in trading, but since there is so much randomness in trading performance anything that can be a mental anchor to increase discipline should be looked into very carefully.
Let’s look at what gives utility to people, money certainly but not just that.
There are many more emotional rewards that our brain is looking for when we make decisions.
Let’s say you have purchased a stock at $1, the price is now $99 and most of your money is into this stock. You want to sell as the loss would be too much if the price crashed but you decide to wait until it reaches $100. What’s the utility of that? The satisfaction to hit a round number, the satisfaction to say that you made 100x, but how much are those satisfactions worth compared to the risk of not managing to sell?
Your heavily invested into some stock, you realize it’s time to rebalance by selling some but you don’t want to do it because you don’t want to reduce your position. But really what real difference would it make strategically if you had let’s say 10%, 20%, 30% less of that investment? Is the risk of not rebalancing worth the satisfaction of having a slightly higher amount?
Your friend has a certain amount of money/shares and you want to have the same or more than him for ego reasons. You’re considering investing more than you should because you want to catch up with your friend. But is the satisfaction of doing that worth the extra risk you’re taking?
You have a certain amount of some investment but you want to have more because you want to be number 1 (or number 10, number 100, number 1000, etc.) in that investment. You’re considering investing more than you should because of that. But is the satisfaction of doing that worth the extra risk you’re taking?
Those emotions that distort our thinking are no different than for example buying a very expensive car just to impress your friends (assuming you could spend the money in a better way, if you’re very rich and the cost of the car is inconsequential to you there is no issue buying it of course). Is it worth to spend a large percentage of your savings in order to impress your friends?