Mental time travel and the valuation of financial investments

Abstract

Purpose

The purpose of this paper is to portray the valuation of financial investments as mental time travel.

Design/methodology/approach

In a series of thought investments, $1 invested in an investment fund is mentally projected forward in time and then discounted back to the present – with no objective time passing. The thought investments feature symmetric valuation (in which discount rates exactly match projection rates) and asymmetric valuation (in which discount rates and projection rates happen to differ). They show how asymmetric valuation can result in differences between the current personal value and market value of an investment and, by way of real-world illustration, between a closed-end investment fund's net asset value and its market value. The authors explore possible reasons for asymmetric valuation.

Findings

Thought investments illustrating mental time travel can be used to help understand both financial investment valuation generally and, more specifically, established explanations of the closed-end investment fund puzzle. The authors show how different expectations, different perceptions of time and risk and different risk and time preferences might help determine value.

Originality/value

There are vast literatures on prospection, discounting and future-orientated or intertemporal decision-making. The authors’ innovation is to illustrate how these mental activities might combine to facilitate financial investment valuation. In particular, the authors show that a low personal discount rate could be a consequence of a shortened perception of future time and vice versa.

Citation

Blake, D. and Pickles, J. (2022), "Mental time travel and the valuation of financial investments", Review of Behavioral Finance, Vol. 14 No. 3, pp. 327-344. https://doi.org/10.1108/RBF-06-2020-0133