Here’s an interesting quandary that should animate more than the few who are economists. Most of what we call money is worthless paper–fiat money–backed by a promise to pay us with more worthless paper, or some commodity (metal, usually) that has little intrinsic (essential?) value. So, why do we get so concerned about losing ‘money’? Basically, because the worthless claim represents something that we do think is valuable, often the accumulated labour that we have put out. That must be worth something, right?
When we have bought something that we value with the paper, we could legitimately become attached to that thing, and as we enjoy it we value it more. Think of a house in that sense. (Many will think of a car, but forgive me if I am not one of those.) Many will think of clothes in that sense. (But forgive me, again, if I decline membership to that group.)
A friend just mentioned to me that she has $2 million of virtual money to invest in a portfolio for an academic exercise. As she described it “fake money, but real market”. She was concerned that market prices and conditions change a lot. “It’s so volatile!!!! Had I started last Friday, I would have lost everything by Monday. Damn the pork bellies and weather!” As she is getting so concerned about making good decisions about where to make her plays, I told her to give me the ‘money’ and stop stressing about the decisions.
I could get into a very long internal discussion about ‘real’ markets and prices, after watching them behave in what I have heard called in insane manner over the past few weeks. Bad news? Sell the US dollar. Good news? Sell the US dollar. That’s some double whammy. Scent (no pun) of more US quantitative easing? Really sell the US dollar hard. It made me very QE-eezy. So, I tried to stop caring a bit about the money flowing in and out. I have to care as I have bills to pay, but I needed to get some perspective.
In trading, one of the lessons that I have learned is that you make better decision when you are using what you see as fake money, such as you have in a practice account. It comes stress-free that it has not come out of your bank account. But, you get emotionally tied to what you take to be real money (remember the worthless paper). It’s funny: you can feel better when you think have no money than when you think you have much.