Explain marking to market will put rationality back in trade

Question

Explain marking to market will put some rationality back in trading.

Answer 1

By marking to market, or using a model-based marking it is as close to it as possible, your losses will be plain to observe. When your theoretically profitable trade is doing badly you will observe your losses mounting up. You might be forced to close your position when the loss gets to be larger. Certainly, you may have been right in the end, only a bit out in the timing. The loss could have reversed, but when you have closed out your position previously then dangerous. Having thought that, human nature is such that people tend to hold onto losing positions too long on the assumption that they will recover, yet close out winning positions too early.