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Time is money, OK, but people use different clocks.
In finance, time is a crucial ingredient. For money to give incomes is a matter of time.
Rates of return use a time criterion as their denominator (yearly rate usually).
 Definitions
 The time horizon is the delay foreseen for an economic goal to be fully reached.
The time preference is the preference between operations giving short term or
long term results
Every
 economic player has a time criterion,
which can vary from an operation to another.
This
personal time horizon / time preference is one of the factors
(together with return and risk) that drives its choice between projects.
For managers, the time horizon is a crucial factor when planning an action.
1) Short term / long term as investment criteria
Cutting investor time into salami slices
An investment time horizon is the delay foreseen to get an expected return on the
money invested.
As there is, as seen below, some human appreciation on time horizons;
what is considered ST, MT and LT might vary with people and situations.
Let us say that, in financial and economic matters, it is rather commonly
admitted that:
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 Very short term is a few hours, a few days, maybe a few weeks
Short term is some months, until one year, or maybe two years,
Medium term includes various slices of time neither
too short or long (3 to 7 years generally).
Long term is above 7 years, maybe until 20
Very long term is over 20 years.
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Types of investment operations, as well as investor styles, are largely related to
the time horizon.
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Usually, money and financial markets, financial institutions, and of course
investors, make a distinction between:
Long term (LT) operations. This is what is behind the word "investing".
Above all, it applies to stable investing, with rare arbitrages (sometimes
called "passive management") or "buy and hold".
Short term (ST) operations.
Here are two categories of ST operations which are quite
opposite
in their process and motivation:
 Temporary
savings (savings deposit, monetary fund...)
Trading, which is the frequent
 buying and selling of assets,
something also called "active management" (see active).
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An investor's time horizon / time span is his preference (due for example
to its situation or its risk attitude) between:
Either short term rewards or safety. Here, two main examples:
The wish to "make money fast"
whatever the
 risk,
On the contrary the prudent goal to keep and manage safely some
 liquidities that the player might need soon.
Or long term rewards or safety.
For example the will to save
money
for the old age
 , or for a remote project,
Or just a general and deep-seated mental aptitude and liking for
anticipating
 things in the long run
(yes, the long term bias exist also, as explained below). |
2) Factors that make an investor's time horizon / span
Everyone its own timepiece.
The time horizon or preference can be:
Rational, as related to life goals and life situations
(obviously, how old is an investor has an impact on his time preference).
Or
emotional (impatience...).
Emotions (and also automaticity / habits) can be more active in short term decisions
while long term ones might be more rational
Or a cognitive expectation, either realistic or biased.
What can make it biased are either short-sighted considerations,
or on the contrary a long term illusion.
They can distort decisions (ST bias or LT bias).
If those biases are
 widespread among financial players, market
pricing anomalies can ensue.
The time preference is not so clear-cut.
An investor can follow several goals that imply different time horizons and
risk attitudes.
This should be done quite consciously (see below "time diversification"),
if not it could lead to contradictions: see "mental compartments".
3) Time horizon biases: what about the ST bias?
Time myopia? Impatience?
The best known (and most common) time horizon bias is the  short term bias .
One of its causes is a mental myopia. It focuses on the immediate future and fast results,
with a disinterest for the longer view. This is sometimes called "narrow framing" (see framing).
Other factors intervene also, such as a lack of self-discipline.
Here are some aspects:
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Many people would not spare enough voluntarily for their old days. This is:
either because they don't see the need.
This would be just a cognitive bias (time myopia),
or more probably (and emotionally) because they lack the self-discipline and
willpower (*) to resist immediate gratification such as consumption.
This is the reason why putting money in pension
schemes is usually mandatory.
(*) See that word. People usually know
that they have to prepare for their
future, as a rational life goal. But circumstances, or the painful feeling that
discipline entails can deter them to follow their plan.
In stock markets, investors over-focus their attention on
quarterly earnings.
This is a source of overtrading (see that word).
More generally, few investors have the strategy to "buy and hold" in order to
take
advantage of the stock's long term prospects (well, if they are reliable).
This can lead to:
Either
 undervaluation of the stocks of some companies which
business model entails a long phase of business investment (research,
development, production facilities, large initial marketing expenses and low
margins to build
market share) before reaching the full
payoff.
The exception is when the market is bullish (see below the LT bias)
and looks for exceptional opportunities.
Or
 overvaluation of companies that under-invest for the future
and overexploit their current mother lode.
This ST bias that affects investors can create also a ST bias (short-termism)
in
 corporate management.
In this case the executives might lack vision in
preparing the
company's strategy, or, instead of spending for the future of
the barn. would prefer to milk the
cow (or in some cases to
take extravagant short term risk in the financial area)
The principal-agent problem (see that phrase) can be at play here, but also
investor pressure.
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4) Time horizon biases: what about the LT bias?
Diamonds are forever? Seeing money in eternity?
The opposite of the ST bias is the
long term bias, in which
the time horizon is overly long.
This bias is less talked about, thus it can be more insidious. It might appear in
stock valuation.
This happened in the Internet stock bubble.
Dotcom investors imagined huge profits, although impossible to estimate, in the far
future, for firms with nearly no paying customers and only costs for the years to come.
Predicting very long term growth is
 hazardous:
There can be illusions about the profit prospects of a new industry.
Even when its sales grow, a "make big money after a while" belief could be illusory.
Firms, industries and country economies suffer good or bad mutations, often
unexpectedly.
Even when they are rather stable, they tend to have a "life cycle" that can
end up in decline
and death.
The longshot bias (see that phrase) is a slightly different phenomenon,
but which can have the same cause - an excessive time horizon.
It is an exaggerated trust in following a market
 uptrend or downtrend
even when it lasts for too long and leads to a gross overpricing or underpricing.
5) What is the lesson to draw for portfolio management?
And for market efficiency?
Time baskets
Time diversification is a possible strategy.
Definition:
Time diversification is a wealth management technique in which investments
are spread into
assets with different time horizons
and market cycles (see rotation).
To put eggs in different time baskets lowers the overall volatility and uncertainty.
Here, better warn about the market horizon bias:
6) A few cents of philosophy ...with some real money consequences Another thing is to ponder over the enigma of time and how we
 perceive it.
Already we mentioned that the notion of short vs. long, when applied to time, is
seen differently according to people and situations, but there is more:
- Is time a continuous or a granular element of life? Also, is its line straight
or
circular?
- Do people perceive / represent it:
As a flow that follows a regular direction?
Or as a circle / a rhythm (even an accordion)?
Or as a series of unvarying and mechanical sequences of precise time units:
hours, days, months, quarters, years, decades?
Do people, and among them investors, act in accordance with such mental
representations?
We might find examples of time rigidity (and regular granularity) in the "calendar
effect" (see that
word).
Conversely, there are examples of time flexibility. Some quantitative analysts enter
a time adjustment in their models, with periods of time acceleration and others of
time deceleration.
Again, such perceptions / representations of time can differ between various
civilizations, historical periods, and of course categories of economic players.
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time saving or time spending
, inefficient to allocate 