Jeremy Bentham

Jeremy Bentham (1748-1832) was an English philosopher, jurist, and social reformer, not an investor. So why is he in an investment dictionary? Because his central philosophy, Utilitarianism, provides the intellectual bedrock for understanding how we make financial decisions. Bentham argued that the best action is the one that maximizes “utility,” which he defined as the one that creates “the greatest happiness for the greatest number.” This isn't just a quaint moral principle; it's the foundation of how economists and financial theorists think about value and risk. For investors, Bentham’s work helps explain the very human, often irrational, feelings we have about money. His ideas led to the concept of diminishing marginal utility—the simple truth that each additional dollar brings you less happiness than the one before it. This single insight is crucial for understanding your own risk aversion and why protecting your capital is just as important as growing it.

Often called the founder of modern Utilitarianism, Jeremy Bentham was a progressive thinker whose ideas influenced everything from law and economics to animal welfare. He believed that human behavior is governed by two masters: pleasure and pain. From this, he proposed that all laws, actions, and decisions should be judged by their consequences—specifically, whether they increase the total amount of happiness in the world. To make this practical, he even imagined a “felicific calculus,” a mock-scientific method for measuring the amount of pleasure or pain an action would produce. While the calculus itself was more of a thought experiment, its core idea—that we can and should weigh the potential happiness (utility) and unhappiness (disutility) of our choices—is exactly what a thoughtful investor does when evaluating an opportunity.

Bentham's philosophy accidentally became a cornerstone of modern finance. While he was thinking about society, his insights perfectly describe the individual investor's mindset. The key is understanding that the “value” of money isn't just its numerical amount, but the satisfaction it brings you.

This is Bentham's most important legacy for investors. The concept, later formalized by economists, states that the utility you gain from each additional unit of something decreases as you acquire more of it. Think about it like eating pizza:

• Slice 1: Pure bliss. You were starving, and it's delicious. Utility is 10/10.
• Slice 2: Still great. Fills a hole. Utility is 8/10.
• Slice 8: You feel sick. Eating it is a chore. The utility is now negative.

Money works the same way. Finding $1,000 when you're broke is life-changing. For a billionaire, an extra $1,000 is barely noticeable. This simple fact has profound implications for investing:

• Losses Hurt More Than Gains Feel Good: Because of diminishing utility, the pain of losing $1,000 you already have is far greater than the joy of gaining an additional $1,000. This psychological quirk is a central finding of behavioral finance and prospect theory. It explains why investors often become overly cautious after a loss.
• It Justifies Risk Aversion: Why would you turn down a 50/50 bet to win $2,500 or lose $1,000? Because the potential pain (disutility) of losing the $1,000 outweighs the potential pleasure (utility) of the extra winnings.

Bentham's thinking, though predating modern markets, provides a powerful lens for the value investing philosophy. It encourages a focus on real-world outcomes and human nature, not just abstract numbers. The Swiss mathematician Daniel Bernoulli had touched upon similar ideas earlier, but Bentham popularized the concept of utility as a driver of human choice. Here’s how to apply Bentham’s wisdom to your portfolio:

1. Define Your “Enough”: The law of diminishing marginal utility proves that chasing every last penny of profit at extreme risk is irrational. The extra utility is tiny, but the potential pain of a catastrophic loss is immense. A value investor understands their financial goals and doesn't take on uncompensated risk once they're on track to meet them.
2. Embrace Your Inner Utilitarian with a Margin of Safety: Buying a stock for less than its intrinsic value is a fundamentally utilitarian act. You are maximizing your potential for “pleasure” (upside) while drastically minimizing the potential for “pain” (loss). A margin of safety is a direct defense against financial pain.
3. Diversify to Maximize Happiness: Diversification is a classic utilitarian strategy. It deliberately limits the maximum possible gain from any single stock in exchange for drastically reducing the chance of a portfolio-destroying loss. You are trading a small amount of potential utility for a huge reduction in potential disutility—a trade Jeremy Bentham would have applauded.