Diminishing Utility

You're seeing Diminishing Utility when a company adds its twentieth feature to a product. The first few features addressed core needs and drove adoption. The next batch addressed edge cases. The twentieth feature serves a tiny fraction of users and adds complexity for everyone. The marginal utility of the feature is low; the marginal cost (complexity, maintenance, cognitive load) may exceed it. The product team has passed the point where more features increase value.

You're seeing Diminishing Utility when someone checks their phone for the tenth time in an hour. The first check might have delivered an important message. The tenth delivers nothing new — the marginal utility of another refresh is near zero, and the cost (attention, anxiety, opportunity cost) may be positive. The behaviour persists because the expected utility of the next check is overestimated — we remember the times a check delivered something valuable and forget the times it did not.

You're seeing Diminishing Utility when an investor adds a 50th stock to their portfolio. The first 20 stocks provided meaningful diversification. The next 20 added some benefit. The 50th adds almost nothing — the marginal diversification benefit is negligible, and the marginal cost (tracking, rebalancing, complexity) may exceed it. The optimal portfolio is not "as diversified as possible" but "diversified enough that the next stock adds less than the cost of adding it."

You're seeing Diminishing Utility when a CEO attends their fifth meeting of the day. The first meeting may have been essential. The fifth often could have been an email or delegated. The marginal utility of another hour in meetings declines — and eventually goes negative when the CEO has no time for reflection, strategy, or deep work. The best leaders cap meeting load precisely because they understand diminishing utility.

Apply diminishing utility to hiring, features, and meetings. The first engineer in a domain has enormous impact. The tenth may have less — and the twentieth may add coordination overhead that exceeds their contribution. The same for product features: the first few address the core job-to-be-done; additional features often serve edge cases at the cost of complexity. Cap meeting load explicitly — beyond a point, each additional meeting destroys more value than it creates. The discipline is to ask "what does the next one add?" before adding.

Diversification has diminishing returns. The first 10–20 positions provide most of the diversification benefit. Beyond that, you are adding complexity without meaningful risk reduction. Concentration has the inverse: the first position has the highest impact, but adding more concentration increases risk. The optimal portfolio balances marginal utility of diversification against marginal cost of concentration. Same for due diligence: the first few reference calls add a lot. The tenth adds little. Know when to stop.

When allocating time, money, or attention, equalise marginal utility across uses. If the next hour of work would add less value than the next hour of rest, stop working. If the next dollar spent on marketing would add less than the next dollar spent on product, reallocate. The principle is simple; the execution requires honest assessment of what the next unit actually adds. We systematically overestimate the marginal utility of things we are used to doing and underestimate the marginal utility of alternatives.

Buffett's approach to capital allocation reflects diminishing utility. He does not diversify for its own sake — he has said that diversification is "protection against ignorance" and that "if you know what you're doing, it doesn't make much sense to own more than six stocks." The marginal utility of the seventh stock — in terms of risk reduction — is low for someone who has high conviction in their picks. Buffett also applies diminishing utility to his own consumption: he lives in the same house he bought in 1958, drives a modest car, and has said that additional wealth would not change his life. The marginal utility of another billion is effectively zero for him. The principle guides both his investing (concentrate where conviction is high) and his spending (consume where utility is high, stop where it diminishes).

Gates has applied diminishing utility explicitly to philanthropy. In a 2013 letter, he wrote that saving a life in the developing world costs roughly $5,000 — and that the marginal utility of his wealth, when spent on that, far exceeds the marginal utility of another yacht or mansion. The principle: his next dollar does more good funding malaria prevention than funding another luxury. Gates has committed the vast majority of his wealth to the foundation, effectively equalising marginal utility across uses — his consumption has hit diminishing returns; his philanthropy has not. The model guided the largest charitable commitment in history.