Diminishing Returns - Why Chasing Bigger Gains Can Lead to Losses

Diminishing Returns - Why Chasing Bigger Gains Can Lead to Losses

If you made a 9% return every year for 10 years, most people would agree that is a strong investing outcome.

But the way that return feels changes over time.

The satisfaction you get from earning 9% in year one is far more intense than the satisfaction you feel in year 10. By that point, the excitement fades. Not because the return is bad, but because your brain has adapted to it.

In economics, this is known as diminishing marginal returns.

When Good Results Stop Feeling Good

Diminishing marginal returns describe a simple idea. The first unit of a reward gives you the most satisfaction. Each additional unit gives you less.

The first pay rise feels amazing. The third feels normal. The fifth barely registers.

Investing works the same way psychologically.

At the beginning, earning 9 percent feels like proof that you are doing something right. You feel smart, disciplined, and optimistic. Over time, that same 9^ return becomes your baseline so It no longer excites you.

Instead of thinking “I am doing well”, the thought becomes “Is that it?”

Psychology - Pleasure, Adaptation, and the Need for More

There is a concept often discussed in psychology known as anhedonia, the reduced ability to feel pleasure from things that once felt rewarding.

The more we pursue pleasure, the more our expectations rise. What once felt exciting becomes normal. What felt normal becomes boring.

In investing, this shows up quietly.

You do not chase higher returns because you need them. You chase them because the old returns no longer give you the same emotional response.

So the mindset shifts…. from 9%….to 12% ….to 15% ….to 20%.

Not because your goals changed, but because your tolerance has changed.

Where Investors Start to Get Hurt

This is often where mistakes happen.

Chasing higher returns usually means taking on more risk. That can come in many forms, leverage, speculative assets, or copying strategies that worked for someone else in very different circumstances.

The danger is that consistency may create false confidence.

When you are consistent for long enough, downside risk feels theoretical. Losses feel like something that happens to other people. But the risk element does not disappear just because it has not shown up yet on your journey. Eventually, that day may come.

Slow & Boring vs Fast & Thrilling

This leads to the real question every investor has to answer.

Do you want investing to be slow, predictable, and almost boring, the kind of boring that compounds quietly over time?

Or do you want it to feel exciting, fast paced, and emotionally engaging, knowing that the thrill often comes with a higher price?

There is no judgement in either choice as It is personal preference.

But understanding diminishing returns helps explain why many investors fail. Not because they were unlucky, but because they associate stimulation with success.

Sometimes the best investment strategy feels like watching paint dry and that is often exactly why it works.