Patience is a virtue, espe­cially when it comes to building cap­ital. But as with most virtues, it’s not always easy to muster, since it usu­ally requires resisting temp­ta­tions for grat­i­fi­ca­tion on the sooner side. Should you put the extra $1,000 earned this month in your retire­ment sav­ings or use it to buy a new suit? Should you approve money from the firm’s “rainy-​​day” fund to cover travel for senior exec­u­tives (your­self included) to a lavish con­fer­ence this summer or let it con­tinue to accrue as a buffer for future chal­lenges? Such deci­sions – a type referred to by econ­o­mists as intertem­poral choices – are char­ac­ter­ized by options that offer dif­ferent rewards as time unfolds. That is, they con­trast smaller plea­sures or gains now with larger plea­sures or gains later.

Almost everyone – from indi­vidual investors to CFOs of large cor­po­ra­tions – would prob­ably agree that the best way to choose between such options would be to objec­tively weigh the poten­tial costs and ben­e­fits offered by each. But, as the past two decades of psy­cho­log­ical research has revealed time and again, the human mind isn’t entirely objec­tive. It’s a well-​​established fact that we dis­count the value of future rewards. For example, if given the choice between receiving $75 dol­lars today or $100 in a year, most people would opt for the former even though a 30% annual return on an invest­ment is dif­fi­cult to beat. Of course, dis­counting as a func­tion of time isn’t inher­ently illog­ical. Some level of it makes good sense; you never can be absolutely sure you’re going to be around in the future to reap the reward. But our minds tend to dis­count future value quite exces­sively – a phe­nom­enon that sig­nif­i­cantly con­tributes to prob­lems ranging from credit-​​card debt to sub­stance abuse.

Read the article at Harvard Business Review →