Delayed Gratification a Risky Move for Investors.
Human beings do not like to wait for things. Not only do most people want instant gratification, they also believe that waiting too long for something implies greater risk, says Michael Bixter, a post-doctoral researcher at Georgia Tech's School of Psychology. This is known as the implicit risk hypothesis, and it is based on the perception that delayed rewards may be less certain than immediate rewards.
"Clearly, though, waiting for delayed consequences has delayed benefits, which is why not spending your entire paycheck and putting it into a retirement account has greater benefits, but so many people find it very difficult to do this."
Bixter added that "the uncertainty associated with delay is one of the reasons why human beings discount the value of rewards over time."
That's fueled by the perception that as the delay until a reward's delivery increases, there is a corresponding increase in the number of intervening events that could prevent the reward from actually being received.
But as much as the future is vast and unknown, much of the fear associated with it has to do with the individual, Bixter said. Furthermore, the extent to which people associate risk in the future with delayed rewards can vary from person to person.
In a recent study, the results of which were presented in a paper entitled "Evidence for Implicit Risk: Delay Facilitates the Processing of Uncertainty," Bixter showed that individuals do not automatically eschew the possibility of a future reward and they don't always associate a future reward with uncertainty. Whether or not they choose to wait for that reward depends on the way in which the information about the reward in question is presented to them, he found: If a person is given information about a delay associated with a future reward, that facilitates the subsequent processing of risk information.
The study showed that participants were more likely to prefer larger, delayed rewards when information about the delay was presented before information about uncertainty, than when the information was presented in the opposite order, thereby showing that an actual delay for a reward and the uncertainty associated with that reward can be mutually exclusive.
Mitigate Risk by Focusing on Reward
Of course, most people do infer some degree of risk when confronted with delay, Bixter said, and that explains why immediate rewards are believed to be more certain and therefore preferable to delayed rewards. However, there are individual differences in the degrees to which people associate risk with delayed rewards, he said, and this can determine whether they decide to go for that delayed reward.
In his study, Bixter found the individual differences of how much risk is associated with delay became apparent when participants were presented with a series of choices between smaller immediate rewards and larger delayed rewards (i.e., $10 immediately or $45 in two months), and showed that not everyone reacts in the same way or has a blanket association between risk and delay.
In the financial planning context, presenting individuals with as much information as possible about a potential reward -- where it is coming from, what its benefits are -- can go a long way toward helping people plan their portfolio, as will getting to know both their time horizon and assessing the extent to which they associate the future with risk.
"Many hold the view that Treasuries are safer because the federal government is viewed as safer and because of that, they might tend to want to stick with investments of that nature because they feel there is less risk associated with the future," he said.
By contrast, there are many individuals who would stay away from investing in emerging or frontier markets, particularly if they're perceived as risky from a political or economic standpoint, which makes it hard to make a case for them even on a long-term investing basis.
However, "everyone's time horizon about the future is different and it's important to know this," Bixter said. "People have different feelings about the future and how long they want to wait for future rewards."
--- Read "Malkiel: Why Emerging Markets Investing Is Well Worth the Risk" on ThinkAdvisor.
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|Date:||Dec 1, 2015|
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