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Alternative Market Briefing

Other Voices: The role of psychology, governance and skills in capturing longer term returns

Friday, May 16, 2014

amb
Dr. Vinay Nair
This article was authored by Dr. Vinay Nair, Founder and CEO of Ada Investments, an equities-based investment platform with offices in New York, Mumbai and Rio de Janeiro. Prior to becoming an investment manager, Dr. Nair was an Assistant Professor of Finance at The Wharton School, where he is now a visiting professor.

In all walks of life, for everyone, time is a significant constraint. This fact plays out in markets as well. Longer-term investment ideas get lesser attention than the ones that provide faster results and gratification. It is well known that, given two similar rewards, humans show a preference for one that arrives sooner rather than later. The neo-classical model of discounting future payoffs is however systematically violated. Consider two separate sets of choices.

a) What would you pick between $100 today or $125 next year?

b) What would you pick between $100 in five years or $125 in six years?

It turns out majority of us pick a faster payoff in choice (a) but are ok with a later payoff in choice (b). A growing literature on hyperbolic discounting highlights this inconsistency. Interestingly, among longer term ideas, this phenomenon might create a zone of unexplored opportunities in the medium term.

The inv......................

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