Present Bias

Present bias is a cognitive bias defined by Wikipedia as the tendency of people to give stronger weight to payoffs that are closer to the present time when considering trade-offs between two future moments

Early exits weigh stronger on investors than further-out exits even if substantially larger.

Under present bias, investors forgo longer-term gains for immediate gratification.

To overcome present bias, consider yourself in the future compared to today.

Ask what your future self wants rather than your present-day self.

If holding the investment longer will make your future self happier, then that can outweigh what your present self wants. 

Another way to overcome present bias is to set goals and criteria for buying and selling and use those for determining when to buy and sell. 

Finally, there’s the time value of money which measures how much future returns are worth based on the time to return.  

By using these calculations you can see the quantitative difference between the two investment choices. 

 

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Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.