The clock is ticking... but our trends are timeless!
Like every year, the end of March will be marked by the time change in many countries. The change to daylight saving time is an opportunity to reflect on time-related preferences in our financial decisions.
The marshmallow of our childhood is timeless: even when we grow up, we remain children!
Although the time horizon we set for our investments is fortunately longer than the turn of the dial, we give precedence to very short-term considerations, with a search for immediate benefits. The famous marshmallow experiment(1) in which children are rewarded with two marshmallows if they resist the temptation to eat the one placed in front of them for twenty minutes, would change its form in adulthood: how to overcome the difficulty of projecting oneself into a distant future in order to seize financially more interesting opportunities?
A phenomenon called "hyperbolic discounting” (or present bias) leads us to prefer immediate rewards to later rewards, implicitly carrying a higher risk of non-occurrence. Moreover, we will prefer a quick but more modest reward (2 euros off each visit to the chocolate shop) to a more substantial but distant discount (12 euros off at the fifth visit). Transposed to our finances, we prefer an investment offering a smaller but quick profit to a larger profit with a longer time horizon. Researchers(2) have shown that the payoff required to accept a deferred payoff is relatively high, especially for people who favor their immediate well-being (no diet, alcohol consumption, etc.) without concern for their own future.
Twenty minutes or several decades: same difficulty!
Long-term wealth considerations (planning) are difficult to carry out in the absence of attention paid to timeframes several decades away, such as retirement or transmission, phases that are often relatively unprepared. The very holding of long-term investments is made more complicated by the difficulty of planning and by our strong preference for the present.
In addition to a lack of anticipation, the extreme focus on near-term maturities generally leads to an overly frequent monitoring of financial performance and the development of a strong fear of loss to the detriment of long-term performance, which researchers call "myopic loss aversion". This aversion leads to a fear of investments perceived as risky (e.g. stocks), regardless of their long-term prospects. A 1997 study(3) has shown that an investor who is promised monthly access to his portfolio will choose to have only 60% of the equity exposure of an investor who can access his assets annually.
We should not forget that the reputation of nationalities regarding the perception of punctuality is heterogeneous: we are culturally more or less well off to be punctual. But... minute! This diversity goes beyond the simple fact of being late for an appointment! A benchmark study(4) highlights the strong heterogeneity of time preferences(5) between countries, notably for cultural reasons (individualism, avoidance of uncertainty, sensitivity to the long term): what seems long for some people (investment prospects, patience in recovering one's stake, etc.) seems therefore not necessarily so for investors in the neighboring country.
Let's stop here so as not to take up too much of your time!
(1) Study ("Cognitive and attentional mechanisms in delay of gratification") by W. Mischel, E. Ebbesen and A. Raskoff, 1972
(2) Study"Risk and Myopic financial decisions" by Michael S. Finke, Sandra J. Huston, 2015
(3) Study"The Effect of Myopia and Loss Aversion on Risk Taking: An Experimental Test" by R. Tversky, D. Kahneman, and A. Schwartz, 1997
(4) Study"How Time Preferences Differ: Evidence from 53 Countries," M. Wang, M-O. Rieger and H. Thorsten, 2015
(5) Comes from "time preference". The value given to time (spend now or later) but also patience.
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