Financial Time Perspective

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Financial Time PerspectiveI was back at Stanford University recently and heard famed psychologist Philip Zimbardo lecture on his latest book, “The Time Paradox.” His work suggests that understanding your own time perspective may help you unlock the secrets of financial freedom. In other words, how we think determines who we are and what we do.

Zimbardo’s book focuses on how we perceive the effects of time on every aspect of our lives and our decision making. His Time Perspective Inventory scores individuals in six different time perspectives. Each perspective comes with strengths and weaknesses, and some are better at handling modern life and wealth management.

Within Zimbardo’s categories are two past, two present, and two future perspectives. Both the past and future perspectives are abstractions. In a very real sense, we only experience the present. The past is an abstraction of gratitude and regrets. Similarly, the future is an abstraction of possible fears and longings.

Although present thinking may have been critical in simpler times of survival, it isn’t necessarily the best perspective today when wealth itself is also the abstractions of shares in a company or zeros in a bank account.

People who live in the future are by far the most successful. Western civilization rose and prospered because of our future-oriented culture. Unlike present hedonists who live in their bodies, Zimbardo writes, “Futures live in their minds, envisioning other selves, scenarios, rewards, and successes.”

He explains that you can test for future thinking as early as age four by giving children one marshmallow and telling them if they wait until you get back to eat the marshmallow, you will give them another one. Interestingly, children who have learned to delay gratification at age four score an average of 250 points higher on their Scholastic Aptitude Test (SAT) 14 years later. It isn’t that time orientation is determined by age four. In fact, Zimbardo argues we are all born as present hedonists, seeking pleasure and sustenance while avoiding pain and bitter tastes. But by age four it is already apparent that some children live in an environment that encourages a future orientation.

Futures make money. They earn more. They get more education. They get better jobs. But most importantly, they save more and spend less. They discuss finances with their children and model future-oriented choices every day for the next generation.

Much of the advice in this column could be summarized as acting in a prudent future-oriented way in your investments.

Present hedonists use their money for fun and exciting experiences. They are the most likely to pile up credit card debt or experience home foreclosure. Their journey from rags to riches, if it happens, is often a round-trip ticket. They consider savings a token expense and a low priority. Impatience may cause them to chase returns.

To present fatalists, money just doesn’t matter. They don’t designate their money for present or for future enjoyment but simply spend it because it’s there. Thus their spending and investments are random, and they are unlikely to reach their long-term goals.

Past-oriented people are rare in the United States. They generally do not take risks, and they invest conservatively. Past-positives focus on their achievement of earning and saving and do not want to risk losing money. Past-negatives remember only investment downturns and don’t want to be burned again. Neither the past nor the present-time perspectives prove to be as successful as the future perspectives at managing their wealth.

We can view our present market turmoil through each of these time grids. Past-positives are thankful for longer term gains over the last few decades, whereas past-negatives only measure their losses from the recent high watermark. Present hedonists use market losses as an excuse to enjoy rather than invest; present fatalists don’t believe what they do matters because global forces are completely out of their control. Only future goal-oriented investors recognize that the stock market has gone on sale, and today is an even better day to invest in a balanced portfolio.

Zimbardo also points out that “smarter people have higher annual incomes but are no wealthier than average people are.” Given that every 10 IQ points correlates to $4,250 a year more in annual income, smart people should be richer. Alas, they are not. Smart people make more, but they also spend more, sometimes a lot more. Zimbardo concludes with this simple moral: “To become wealthy you cannot spend more money than you make, and you must invest wisely.” Sage advice.

Some researchers suggest that the present orientation of the poor is pathological. But Zimbardo is more optimistic. He believes we can learn to be sufficiently motivated and to change our attitudes and the behaviors associated with them.

Zimbardo offers the following five simple steps toward achieving financial freedom and using time to work for you: (1) The present is the best time to start investing. (2) Time in the market is more important than timing the market. (3) Know when your time will be up; those with a long time ahead of them can afford more risky investments. (4) You can’t time the markets. (5) A hedonistic time perspective is an expensive habit few can afford.

I asked Professor Zimbardo what he thought was the ideal time perspective for Americans today. He replied, “It is vital to develop an optimal blend of several time zones, so that you are able to flexibly shift mentally from one to the other depending on the situation. When there is work to get done, call up your future focus–but not excessively so (that can lead to sacrificing family, friends, fun and sleep). When you complete a task, take a time-out to reward yourself, indulge the present hedonist in you (get a massage, manicure, hot tub, see a movie, read a good book, meet a friend at a coffeehouse) but only moderately so. And always make time to engage with your positive past, your family, your own identity over time, with your legacy and cultural foundation. The past gives you roots; the present hedonism supplies the energy to take chances, to improvise, to take risks; the future gives you wings to soar to new destinations, to imagine new visions. You can have it all if you work at creating this balanced time perspective.”

Perhaps a future study could find the correlation between your Zimbardo Time Perspective Inventory Score, your credit score and the size of your investment portfolio. To see how you score, visit; take the test and score it.

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David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. In addition to his financial writing, David is a co-author of The Haunting of Bob Cratchit.