Weve all been frustrated in the stock market before, havent we?
Did you remember the time when you identified a really good stock with really good news on its heels and rallying strong? However, just a couple of days after you buy shares of that company, it pulls back and you incurred a loss? Even worse when you used futures on that stock instead?
Didnt it make you wonder why such strong stocks pull back so strongly? In fact, why does stock markets even pullback as a whole?
There is an explanation to this and it is what we refer to in economics as the Law of Diminishing Marginal Utility. The Law of Diminishing Marginal Utility states that as consumption of something increases, the satisfaction (marginal utility) of having that something decreases as every unit of that same thing is given to that same person.
Too abstract? Well, it really means in layman terms that the more of something a person have, the least the satisfaction in that thing in question. Have you ever been to a buffet? Can you remember the satisfaction of that first taste of food after having prepared for this by starving for the day? However, can you remember how less satisfied you...
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