Press Office Feature : Why we blow our Christmas bonuses (and why we need to save ourselves from ourselves)
|Company:||Foord Asset Management|
|Posted:||25 Nov 2014|
Of course, any long term investor would immediately pepper you with criticism, arguing that if you were to invest your Christmas bonus wisely, you might stuff your Christmas stocking to overflowing in a few years with the proceeds! Many retort that this is more easily said than done.
This article is not about how much more money you would have had if you had invested your Christmas bonus a couple of years ago – although, to be fair, a R10 000 bonus invested in Foord’s Flexible Fund of Funds 5 years ago would have been worth almost R25 000 today (#justsaying).
Rather, we examine why it is that our propensity to spend the windfall now is so much greater than the inclination to let it grow so that we can spend more later. It is this behaviour that is at the heart of investing.
Much of the seemingly errant behaviour of spending now rather than saving can be demonstrated with a simple experiment.
Using the same numbers referred to above, most people would rather spend the certain R10 000 now than deal with probabilities that give a 10% chance of having R50 000, a 1% chance of having nothing and an 89% chance of keeping R10 000.
Although the probability-weighted payoff of the latter scenario is R13 900, most people would still prefer to have the R10 000.
However, when choosing between an 89% chance of having nothing and an 11% chance of keeping R10 000, or a 90% chance of having nothing and a 10% chance of having
R50 000, most people choose the latter (where the probability-weighted payoff of is R5 000).
The combination of these two experiments reveals an inconsistency in utility called the Allais Paradox – by choosing the former of the first two scenarios and the latter of the second two scenarios, we choose in a manner that is not entirely rational.
A rational person should choose either the first outcome in both scenarios or the second outcome in both scenarios.
In a nutshell, we prefer the certainty of known outcomes. We prefer the bird in the hand to the two in the bush.
Now, Christmas consumption has everything to do with utility – spending that bonus on gifts for ourselves or others gives us pleasure.
Indeed, the act of deferring that expenditure (so that we can potentially derive greater utility by spending more later) might even cause us pain.
We innately prefer the certainty of spending what we have now than the uncertainty of saving now and having more to spend later.
Christmas is a time of joy and giving, but perhaps it should also chasten us somewhat and challenge our resolve.
Investment is all about building a platform for later consumption – letting a capital base grow so that it can generate income and be drawn down upon later.
Perhaps during the festive season, there could be time for introspection to consider how we perceive utility and whether or not we succumb to our instinctive inability to delay gratification.
Maybe those fortunate to receive Christmas bonuses might defer the immediate pleasure of consumption for the potentially greater pleasure of being able to enjoy the greater utility of the gift of giving later.
Foord’s track record suggests that “potentially” is more akin to “very probably”.
Heather McCulloch is Head of Retail Investments in the Western Cape for Foord Asset Management
|There are no comments at this stage. Be the first to comment!|
|Please Login To Comment On an Article - Click here To Login|
Car Insurance Quotes
Household Insurance Quotes
Business Insurance Quotes
Funeral Insurance Quotes
Life Insurance Quotes
Read the InsuranceQuotes Blog