From a behavioural perspective, our ability to meet our long-term investment objectives is really about one thing: managing the conflict between our desire to save for the future and our craving to make ourselves feel better in the present. This has always been an incredibly exacting challenge, but it is being exacerbated by an industry that seems set on innovations aimed at exploiting our weakness for immediate satisfaction.

Back in 1997, economist David Laibson published a paper titled “Golden Eggs and Hyperbolic Discounting”. In it he contends that our long-run savings and investment goals are frequently compromised by the behaviour of our present-biased selves.

There are two key elements to this:

• We fail to save sufficiently for the future because we choose to consume more today.
  
  
• We fail to keep our savings invested for the long run because of our response to short-term volatility and temporary market losses.

Laibson argues that investors are therefore blighted by having “too much” liquidity, which gives us ample opportunity to prioritise how we feel right now over our future needs. If we know that humans have this strong tendency, then illiquidity becomes incredibly valuable – because it protects us from ourselves.

While Laibson refers to the value of illiquidity, he is not advocating a wholesale switch into private markets. What he means is the use of commitment devices: steps we can take to prevent panic selling or otherwise stop us reacting in-the-moment at the expense of our future needs.

Commitments come in many forms – the most obvious being investment vehicles holding genuinely illiquid assets with lock-up periods. Not everything has to be so punitive, however. Soft frictions, such as auto-enrolment or the Save More Tomorrow scheme in the US, can also be extremely effective. Anything that reduces impulsive behaviour can deliver value many years from now.

While tools that encourage commitment can have a dramatic impact on behaviour, there is a problem: we don’t like being asked to commit. There are several reasons for this:

• It feels like a restriction of choice and agency. Adding friction to slow our decision making or reducing our ability to act can feel like a loss of freedom. Imagine if an investment platform introduced a 24-hour “cooling-off” period for every trade. This would likely be effective at limiting hot-state behaviour, but few people would choose to use it.
  
  
• We don’t think we need them. Commitment devices are designed to counter problems caused by our present-biased selves. To value them, we must first accept that we suffer from this behavioural failing. Of course, we all do – but we are far more likely to see it in others than in ourselves.
  
  
• Commitment devices involve trade-offs. Anything that reduces liquidity or limits action for the benefit of our future self comes with a present-day cost. This may not just be frustration at our inability to act; it could also mean being unable to access funds when they are genuinely needed.

Laibson made the argument about the dangers of “too much liquidity” nearly 30 years ago, but his case feels more relevant – and more urgent – than ever. Humans remain inescapably present-biased, yet the investment landscape has evolved in ways that exacerbate (and perhaps deliberately exploit) this bias, to the detriment of our long-term savings goals. There are a host of contributing factors, but these are the most culpable:

• ‘24 hour’ trading. Financial markets are increasingly ‘always open’, providing instant liquidity at all times. There is no restriction on our ability to react in the moment. This can be framed as technology-driven liberation or, more realistically, as a behavioural disaster.
  
  
• Constant portfolio access. Not only can we trade at any time, but we can live the minute-by-minute fluctuations in our portfolio values. Nobody would argue that investors should not have access to this information, but few have seriously considered the behavioural cost.
  
  
• More news and emotional stimulus. We are bombarded by financial news and opinion, a phenomenon greatly amplified by social media. There is more news, more noise, and more negativity. Humans make poor decisions when emotional stimulus is high and friction is low – precisely the environment we now inhabit.
  
  
• The financialisation of everything. Over time, more aspects of life are becoming financialised products to buy and sell – stocks, currencies, cryptocurrencies, sports, even political events. Everything has become something to trade. The line between gambling and investing is increasingly blurred, and may soon disappear entirely.
  

All of these factors increase the likelihood that we sacrifice long-term goals for short-term fulfilment. If Laibson was worried in 1997, he should be petrified today.

We can think of the golden egg as the future consumption funded by our savings, and the goose that lays it as a sensibly diversified investment portfolio. Financial and technological innovation is making it far easier to kill the goose.

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Laibson, D. (1997). Golden eggs and hyperbolic discounting. The Quarterly Journal of Economics, 112(2), 443-478.

(Laibson frames the ‘golden egg’ in a slightly different way in this paper, but the overarching point is the same).

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My first book has been published. The Intelligent Fund Investor explores the beliefs and behaviours that lead investors astray, and shows how we can make better decisions. You can get a copy here (UK) or here (US).

All opinions are my own, not that of my employer or anybody else. I am often wrong, and my future self will disagree with my present self at some point. Not investment advice.