Lesson 19 of 25 · 6 min
The illusion of control over the timing of a sale
A plan to act at a price assumes the price will be available, and large moves are the ones that skip it.
The illusion of control is the tendency to feel that an outcome is manageable when the manageable part is only the intention. An intention to act at a particular price is a plan about one's own conduct. The execution is a plan about the market's conduct, and those are different objects.
Prices do not always pass through the levels between two points. A market that closes at $151 and opens at $129.60 traded at neither $148 nor $140 nor $133 — those levels existed in the interval but not in the trading. A plan referencing $148 is a plan referencing a price that was never available to anyone.
Put numbers on it. An intention to act at $148 across 5,600 shares implies proceeds of 5,600 × $148 = $828,800. If the market gaps and the first available price is $129.60, the proceeds are 5,600 × $129.60 = $725,760. The shortfall is $103,040, and the execution occurred ($148 − $129.60) ÷ $148 = 12.4 percent below the level the plan was built on.
Under a pledge there is a second party with the same problem and a different remedy. A lender facing a gap does not wait for a better price, because the delay is the exact thing the haircut was priced for. So the moment at which a borrower's plan becomes unavailable is close to the moment at which the lender's own right to act becomes live, and the two are correlated because they have the same cause.
The intention was never wrong. It was a statement about what would be done, conditional on a price that the mechanism of a gap removes exactly when the condition is reached.
Key terms
- Illusion of control
- Treating an outcome as manageable when what is actually manageable is only one's own intention.
- Gap
- A move from one price to another with no trading in between, typically across an overnight close. Prices inside the gap never existed.
- Execution price
- The price at which a transaction actually occurs. The only price with a cash consequence.
Worked example
A plan at $148 and a market at $129.60
5,600 shares. An intention to act at $148. The market closes at $151 and opens at $129.60.
- Proceeds at the planned level
- $828,800
- Proceeds at the first available price
- $725,760
- Shortfall
- $103,040
- Execution below the planned level
- 12.4%
- Trades available at $148 in this move
- None
5,600 × $148.
5,600 × $129.60.
($148 − $129.60) ÷ $148.
The difference between the plan and the outcome is $103,040, and no error was made by anyone. The price simply was not offered.
Check yourself
A holder intends to act at $148 on 5,600 shares. The market closes at $151 and opens at $129.60. What is the cost of the gap, and why was the plan not executable?
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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.