Does Delaying an Investment Decision Influence Risk Tolerance?

What is it about?

Every major choice we make in life—from choosing a career to deciding whether to smoke a cigarette—is influenced by how we think about risk. Imagine walking into a casino. Would you put your money on a game with high rewards but also high risks, or would you choose a safer bet? Now, what if you had to wait a week before playing your chosen game? Would your choice change? This was the central idea of my recent study in Tanzania. I wanted to see how people's decisions about money and risk were influenced when there was a time delay involved. Think of it as choosing an investment today but only getting to put your money down on it a few weeks later. Here's how the experiment worked: Decision Time: Participants had to decide how to split some money between a high-risk, high-reward option and a safe bet. Think of it as choosing between a slot machine that could either give five times the money or nothing at all and a savings account that guarantees your money back. Putting Money Down: After making their choice, participants were given actual money to play out their decisions. But here's the twist: some had to wait longer than others to do this. The Big Reveal: After everyone had put their money where their mouth was, we revealed which investments paid off and which didn't. So, what did we find? When people had to wait longer between deciding and actually investing, they became bolder with their choices. On average, while most participants were fairly cautious, putting two-thirds of their money in the safe bet and one-third in the riskier slot machine, every extra week they had to wait added about 3% more to the riskier bet. So, by the end of a month's wait, they were putting roughly 11% more into the high-risk option. Why does this matter to you? Well, it tells us that time can surprisingly affect the risks we're willing to take. It's not just about weighing up potential gains and losses; the longer we have to wait, the bolder we might become. For those looking at saving, investing, or even just understanding human behavior, that's a big deal. Next time you're making a big decision and there's a delay involved, remember: time might just change how you feel about risk.

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Photo by Kevin Ku on Unsplash

Photo by Kevin Ku on Unsplash

Why is it important?

Imagine for a moment that the choices you make—big or small—are not as "free-willed" as you think. What if something as simple as seeing an image or hearing a particular sound right before you make a decision can influence that choice? This idea might sound straight out of a sci-fi movie, but it's rooted in a concept from psychology called priming. And lately, it's making waves in the world of economics. Priming happens when our brain is subtly influenced by stimuli we've just experienced. It's like when you see a cookie ad and suddenly crave one, even if you weren't hungry a minute ago. Now, researchers are exploring if similar triggers can influence our financial choices. In recent studies, like one by Lichand and Mani, they found that external events—a sudden change in the weather—can impact our attention span and even our impulse control. These events act as "mind tricks", nudging us toward certain economic decisions. The experiment we're talking about today goes one step further. It asks: can knowing about a future event—like when you'll be making an investment—affect how risky you'll be with your money? Spoiler alert: it can. The mere knowledge of when you'll be executing your investment decision, in our study, acted as a "time trigger" or temporal priming. And it made people take more risks. So, why does all this matter to you? Understanding Influence: First, it's always good to know what might influence our decisions. Awareness can lead to better choices. For policymakers and businesses, understanding these subtle "nudges" can help design more effective strategies. Time Matters: The study shows that external triggers and even our perception of time can influence economic choices. This isn't just about buying things—it impacts how we invest our money. While a lot of past research has looked at how we decide what to buy now versus later, this research provides a fresh angle, focusing on investment choices. In a nutshell: our minds are fascinating, complex entities. The more we learn about how they work, especially in relation to money, the better equipped we are to make smarter, well-informed decisions. Whether you're an economist, policymaker, or just someone curious about why we do what we do, this study shines a light on the intriguing interplay between our brains and our wallets.

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