There is nothing like entering the wrong end of your 30s to trigger a bout of introspection and stock-taking.
The inexorable slide towards 40 has this week lead me to consider not only what I have achieved with my life so far, but also what my goals should be for the next few years. What do I need to do now if I am to become the happy and successful 40 or 50-year old version of myself which exists inside my mind?
Amid all this soul-searching I came across an interesting new study which suggests our ability to look forward to a future self, and back from that future self to the present, can influence our valuation of potential investments.
Value-time curve psychology, published by the Pensions Institute at Cass Business School, invites us to think of valuation as mental time travel and to view a valuer as a series of “psychologically connected temporal selves”. It presents a series of “thought investments” in which a valuer’s present self projects an initial value forward in time and that projected future value is then discounted back in time, by the valuer’s future self, to the present.
Still with me? Good.
The paper, by David Blake and John Pickles, uses value-time charts to trace these mental time journeys. It explores possible causes of time preference and considers how our personal characteristics can influence valuation. It explains why, for example, £1 invested in equities is for some people worth more, and for other people worth less, than £1 invested in bonds.
According to Blake and Pickles, mental time travel has, traditionally, been assumed to be symmetric – the forward and return journeys (“prospection” and “retrospection”) follow identical trajectories, save for the direction of travel. Translated to valuation, this means that £1 thought-invested symmetrically is valued at £1. Neither the projected growth rate nor the valuation period affects present value (£1 “thought-invested” symmetrically in equities for 10 years, for example, has the same present value as £1 “thought-invested” symmetrically in bonds for five years). A symmetric valuer, in other words, has temporal neutrality and is risk indifferent.
Recent psychological research reveals, however, that the ways in which we mentally represent the future and the past are not necessarily the same – prospection and retrospection are not always identical. The paper translates this finding to valuation and explains how differences in the ways in which we project and discount mean that we are not always temporally neutral. Put another way, present value does not always equal initial value.
As Blake explains: “Some of us are, psychologically, short-sighted or ‘myopic’. We have ‘positive time preference’ – we value the present more than the future. When ‘thought investing’, present value is less than initial value. In contrast, some of us are far-sighted or ‘hyperopic’. We have ‘negative time preference’ – we value the future over the present. For us, the present value of a ‘thought investment’ exceeds its initial value.”
So there you have it. It seems becoming a year older has caused me to become far too hyperopic, placing too much stock in the happiness of my future self rather than enjoying what I have right now. In life, as investment, it helps to take a symmetrical approach. So while it never hurts to plan ahead, taking the time to appreciate the present is just as important.
You can read the full paper here: http://www.pensions-institute.org/workingpapers/wp1403.pdf
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