The Danish tastes great, we know that it is unhealthy, yet we still devour it. Any penalties are distant. That concept is called temporal discounting. It may be one reason why investors can be cavalier in committing to high-risk deal flow. Apply the notion to hedge funds, initial public offerings, or frontier markets. Some investment choices may not make sense for certain institutions or individuals, but the affirmation generated by near-term market momentum is immediately satisfying. We highlight an experiment in which psychologists built a “vending machine from hell.” Selected snacks were dispensed with a 25-second delay. Healthier alternatives were sold instantly. The researchers affirmed that behavior is hard to change over the near-term, but it can be modified over time. In our world, we wonder what would happen if more investors held back temporarily on cash allocations to high-flying opportunities. Portfolios might have fewer aneurysms, at least metaphorically.
Our Vantage Point: Those who make hasty decisions about high-risk opportunities may face unanticipated outcomes. Better to take added time for more thorough research and analysis. ■
Learn more at The Atlantic.
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Image: Locking away temptation has cross-disciplinary appeal. Credit: Peteer at Can Stock Photo Inc.