You prefer immediate rewards vs. long-term gains.
But investing is for the long term.
When we are presented with distant commitments, we tend to stumble on the difficulty that our brain has in placing us in the future with any degree of accuracy.
Why is that?
Because our brain evolved to make determinations about immediate threats and rewards, it’s a stretch to gain perspective even a few weeks into the future.
𝗢𝘂𝗿 𝗯𝗿𝗮𝗶𝗻 𝗶𝘀 𝗮𝗹𝘄𝗮𝘆𝘀 𝗵𝗮𝗽𝗽𝘆 𝘁𝗼 𝗰𝗮𝗽𝗶𝘁𝗮𝗹𝗶𝘇𝗲 𝗼𝗻 𝗮𝗻 𝗶𝗺𝗺𝗲𝗱𝗶𝗮𝘁𝗲 𝗿𝗲𝘄𝗮𝗿𝗱.
Economists call this tendency Extreme or Hyperbolic Discounting.
S̳c̳e̳n̳a̳r̳i̳o̳:̳
When offered a cookie today or two cookies tomorrow, waiting seems intolerable and we eat today.
When offered one cookie in 365 days or two cookies in 366 days, waiting suddenly seems easy and we say we would wait.
People more heavily discount the immediate than the distant future, because they prefer a small but immediate payoff over a larger payoff down the road.
Some discounting is rational; nonetheless, investors consistently take it to the extreme.
Having decades ahead of us to invest for retirement, we trade in and out of the market to avoid small, short-term losses almost always at the expense of long-term returns.
This threatens our retirement experience!
R̳e̳m̳e̳d̳y̳:̳
A complementary route that deals not with present & future rewards, but with present and future selves.
Research shows that we might fail – due to a lack of belief or imagination – to identify with our future selves.
In studies, participants interacted with realistic computer renderings of their future selves using immersive virtual reality hardware and interactive decision aids.
In all cases, those who interacted with their virtual future selves exhibited an increased tendency to accept later monetary rewards over immediate ones.
This was caused by imagining the future self who would benefit (or suffer) from the outcomes of the decisions made today.
C̳o̳n̳c̳l̳u̳s̳i̳o̳n̳:̳ ̳P̳i̳c̳t̳u̳r̳e̳ ̳y̳o̳u̳r̳ ̳F̳u̳t̳u̳r̳e̳ ̳S̳e̳l̳f̳
Change the timescale of your life, and you change your life.
Philosophers and economists argue that an important determinant of intertemporal choice is a person’s sense – or lack thereof – of psychological connection with his or her future self.
Hence, to people estranged from their future selves, saving is like a choice between spending money today or giving it to a stranger years from now.
We suffer “empathy gaps” and as such, we misunderstand how we would feel in the future about the decisions we make in the present.
So, in cases of major decisions, we might want to picture our future selves first and then think about how we want our story to be told in the future.
Part of the good life is making provisions for the future.
So, my suggestion is not to avoid making long-term plans, but to 𝗮𝘂𝘁𝗼𝗺𝗮𝘁𝗲 𝘆𝗼𝘂𝗿 𝗺𝗼𝗻𝘁𝗵𝗹𝘆 𝗶𝗻𝘃𝗲𝘀𝘁𝗺𝗲𝗻𝘁 𝗽𝗹𝗮𝗻𝘀 and 𝘁𝗵𝗲𝗻 𝗳𝗼𝗰𝘂𝘀 𝗺𝗼𝗿𝗲 𝗼𝗻 𝘁𝗵𝗲 𝗻𝗼𝘄.
“Plan for the future, because that is where you are going to spend the rest of your life.” — Mark Twain
“A healthy psychological immune system strikes a balance that allows us to feel good enough to cope with our situation but bad enough to do something about it.” — Daniel Gilbert
“Play iterated games. All the returns in life, whether in wealth, relationships, or knowledge, come from compound interest.” — Naval Ravikant
On the same topic, you might want to watch Daniel Goldstein’s TED Talk describing tools that help us imagine ourselves over time so that we make smart choices for our Future Self. (16 mins)