Behavioral finance FAQ / Glossary (Time)
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Time arbitrage, time value
Time is money, OK,
but people weigh time and money differently.
Is the time spent worth
the money gained or saved?Time has its value and its use.
It can be enjoyed, it can also bring pain.
But if time has a human value, it can seem strange to consider it as a ware that
obey economic criteria. But why not ?
Time as a key economic resource? Certainly!
The relation between time and economics are strong and varied:
* Time is one of the resources that makes you a breadwinner
("time is money").
* In financial calculus, time is as a factor in most or its equations.
=> Time has to be managed wisely when this aspect is at stake.
In that respect, studies have shown that people often have no clear
idea of what their time is worth.
When they are doing an arbitrage between:
The time they will need to spend in order
to gain or save some money,
The amount of money actually gained
people often rely on quick and easy rules of thumb
(heuristics) without collecting and fully analyzing all
Do people spend enough time to think about
...what time to spend?
In order to make decisions, people often take less thinking time:
about time saving or time spending
than about money saving or money spending.
(Investment) Time horizon, bias, preference, span
.03/4d - 05/10i,12d - 08/3d +
long shot bias, (narrow) framing,
overtrading, short time bias,
calendar effect, active / passive
- Time is money, OK, but people use different clocks.
In finance, time is a crucial ingredient.
For invested or lended money to give incomes is a matter of time.
Rates of return use a time criterion as their denominator (yearly rate usually).
The time horizon is the delay foreseen for an economic goal to be fully
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.
Also, for managers (but not only for them), 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:
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,
Medium term includes various slices of time neither
too short or long (3 to 7 years generally).
Long term is over 7 years, maybe until 20
Very long term is over 20 years.
The types of investment operations, as well as the investor styles, are largely
related to the time horizon.
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
Trading, which is the frequent buying and selling of
assets, something also called "active management" (see active).
An investor's time horizon / time span is his preference (linked for
example to its situation its risk attitude) between:
Either short term rewards or safety. Here, two main examples:
The wish to "make money fast" whatever the
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 making 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, looking for immediate satisfaction...).
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
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).Well, we cannot wait for eternities but such hurry is sometimes excessive and a
source of mistakes.
Other factors intervene also in time myopia, such as a lack of self-discipline.
Here are some aspects:
Many people do not spare enough voluntarily for their old days.
either because they don't see the need.
This would be just a cognitive bias (time myopia),
or more probably (and emotionally) as they lack the self-
discipline and willpower (*) to resist immediate gratification
This is the reason why to put 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 events, or the painful
feeling that discipline entails can deter them to follow their plan.
In stock markets, investors over-focus 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
(supposing they are reliable).
This can lead to:
Either undervaluation of stocks of 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 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 (short-termism) that affects investors can create also
a ST bias in corporate management.
In this case the executives might lack vision in preparing the
the company's strategy.
Instead of spending for the future of the barn, they would
prefer to milk the cow (or sometimes 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.
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
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
Firms, industries and country economies suffer good or bad mutations,
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 excessive trust in following a market uptrend or
downtrendeven when it lasted already for too long and brought a
gross overpricing or underpricing.
5) What is the lesson to draw
for portfolio management?
And for market efficiency?
Time diversification is a possible strategy.
Time diversification is a wealth management technique in which investments
are spread into assets with different time
horizonsand 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:
When mimicry drives all investors to privilege the
same time horizon, usually a general quest for
* short term gains in bubble periods,
* or static investments in crash periods),
The market gets then fully imbalanced , inefficient to
allocate resources and in high danger.
6) A few cents of philosophy
...with some real money consequences
Another thing is to ponder over the enigma of time and how we
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
- Is time a continuous or a granular element of life?
- Also, is its line straight or cyclical / 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
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
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