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Clarity comments on Open Thread August 31 - September 6 - Less Wrong Discussion
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In digital markets with extremely quick liquidity like the stock exchange, Is investing based on macroeconomic factors and megatrends foolhardy? Is it only sensible to invest when one has privellaged information including via analysis of public data at a level no one else has done?
Unpack the question. What do you mean by "foolhardy"? What is your next-best option for your money?
In almost all cases, you should opt not to make a wager on a topic where you are at an information disadvantage. However, investments are not purely a wager - they're also direction of capital and sharing of risk (and reward) with for-profit organizations. It's quite possible that you can lose the wager part of your investment and still do fairly well on the long-term rewards of corporate shared ownership.
One shouldn't expect to systematically beat the market without privileged information. But even "trying to beat the market" (depending on what exactly that strategy entails) or doing what you describe is often better than what most people do in terms of actually growing their savings. Financial securities (especially stocks) have high enough long-run expected returns such that a "strategy" of routinely accidentally slightly overpaying for them and holding them still results in a lot more money than not investing at all.
Not investing is far worse than shoving your money into random stocks and committing to reinvest all dividends for the next 50 years.
Is there absolute utilitty maximisation in portfolio diversification or is that just a risk control mechanism? Could I pick one random stock and put a whole lot of money in it? I suspect I may be commiting the law of large numbers here (or the gambler's fallacy).
If you're not familiar with it, you should check out www.bogleheads.com for investment/finance advice.
(Not trying to discourage you from discussing this here... just that if you don't know bogleheads, it's quite valuable)
Look at Kelly Betting for some information on why "risk control" is utility maximization.
Presuming you have declining marginal utility for money, picking one random stock gives you the same average/expected monetary outcome, but far lower utility.
It's purely for risk control, but most people are extremely loss averse and so do well to diversify.
You could. It's a bet with positive expectation and a really risky one. But people do much dumber things with their money. Having said that, I'd recommend an index fund instead if you're plopping a whole lot of money in.