Applying Principles of Investment Analysis To Life Decisions: Risk, Reward, and Time

Evaluating our daily decisions in the same way we price investments is more practical than it might seem at first

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While you may not view them as such, you make investment decisions every day. gives a very general definition of investment as the “commitment of resources to achieve later benefits.” Although often viewed in the context of financial decisions, the notion of investment generalizes well beyond money.

Take everyday choices as examples: Should you spend time scrolling through Reels or studying for an exam? The key difference between these options lies in the timing of the associated reward — much like the concept of in finance. The first provides instant gratification, while the second offers potential rewards down the road — such as a good grade that could bring you closer to a desired career.So, how do you make these decisions? It boils down to two key factors:

1. First, you’d want to weigh how much you value the present versus the future. By choosing to study, you’re missing out on all the fun activities you could be doing now. Enjoying these fun activities now may certainly feel more valuable than enjoying them tomorrow — or in ten years. But by how much, exactly? Does the promise of a great career and all it brings justify the sacrifice? This depends on your time preference.
2. Second, consider the uncertainty associated with these future rewards. Even if you study now, there’s still the risk that, due to sheer bad luck, you won’t perform well on exam day. Whether you will accept the risk depends on your risk preference.

(Investors undergo a similar process when determining interest rates across different maturities, which gives rise to the yield curve. I covered this topic in a previous article.)

Let’s take a closer look at these two factors.

Time Preference: Washing the Dishes, Now or in 15 Minutes?

For physicists, time is relative. For bankers, time is money.

Financial analysts spend their careers pricing complex contracts involving future payments — which is a good way to describe most financial assets, including bonds, stocks, and derivatives. That’s why they’ve developed a neat way to quantify the value of time: the discount function, which is, put simply, a way of determining any future payments’ .

Every person has a discount function that reflects their time preference.

To estimate your discount function, ask yourself how much you would pay now to receive $1,000 tomorrow, in a year, or in 10 years. Repeat this process for different time frames, and you’ve mapped your personal discount function. A person who enjoys spending, for instance, might accept smaller amounts just to get the money today, compared to someone who prefers saving. This type of reasoning is easily generalized to other types of decisions — such as the one with Reels and studying — although it’s not as easy to quantify them.

According to behavioral economists, people generally tend to be present-biased, which is — you’ve guessed it — characterized by an irrational preference towards the present (a good example is the phenomenon of ). This manifests as the tendency for people to make decisions that are suboptimal in the long run.

Put differently, washing the dishes in 15 minutes always sounds much better than it actually is. Especially after 15 minutes have passed.

Risk Preference

The future is uncertain. Even the best financial analysts struggle to predict what the stock market will do. Banks see steady returns but lose money when borrowers fail to repay. Venture capital investors lose money almost all the time, but win big when they do get it right. Just like these entities, we all face different kinds and degrees of risk. The real question is how we manage it. Should you bet your house on a roulette wheel? Probably not. Should you take out a mortgage to fund a social-media-for-cats startup? Well, maybe.

Your perception of risk is driven by how much you value certainty over uncertainty.

Most individuals prefer a guaranteed payoff over a fair but uncertain bet, making them risk-averse. Some, however, choose the uncertain payment — even if it leaves them worse off on average. Why would someone do such a thing? It’s either that people enjoy the uncertainty and consciously pay for it (in the form of an expected loss), or they see it as an effective way to generate income. While the former can be somewhat justifiable — in the sense that it’s difficult to argue against what someone finds enjoyable — the latter is simply an example of bad decision-making.

Each decision you make — or don’t make — reveals your time and risk preferences, and it’s likely that you typically default to one pattern of behavior, irrespective of context and situation. By analyzing these two preferences, we can identify four distinct behavioral archetypes, which in my view map quite well to what we observe in real life. The Sensation Seeker, The Great Spender, The Climber, and The Jumper each represent the extremes of the preference matrix.

Time and risk preference matrix

• The Sensation Seekers prioritize the present over the future and are reckless in their approach to risk. Gamblers, for example, engage in high-risk bets with a high return potential over a very short time horizon — it’s a wicked combination that makes this archetype the perfect target for various get-rich-quick scams.
• The Great Spenders favor certainty — but only if it’s happening now. Within the financial realm, they tend to spend most of their disposable income on current pleasures. The Great Spenders are credit card companies’ favorite customers.
• The Climbers are future-focused but risk-averse. They are typically conservative in their investments, looking to preserve their wealth through low-risk, low-yield means such as savings accounts. Professionally, they are skeptical toward risky ventures in favor of climbing the corporate ladder.
• The Jumpers are a unique category. They think long-term and are unafraid of taking significant risks, making them the great politicians, scientists, entrepreneurs, and artists who drive technological and cultural progress.

Do Whatever You Want, But Know What You’re Doing

I’m not here to tell you that you should aim to be a Jumper or a Climber, though those two are often seen as the most desirable archetypes. I will say this: Know what you’re doing.

Have whatever goals you like — but ensure your actions align with them.

If you tell me your goal is to achieve financial independence in a few years, I don’t expect you to blow your paycheck at every opportunity, or fall for a multi-level marketing scheme as a way to make a quick buck. If you don’t care about the future that much, have at it — I take no issue with that. Just make sure you know what you’re doing.

Various philosophical schools offer different views on the future versus present dilemma. The , for example, focused on the gratification of immediate sensory pleasures with little concern for long-term consequences. In contrast, the Judeo-Christian tradition emphasizes sacrifice, which inherently implies a focus on the long term.Long-term focus, if properly directed, breeds success for the individual and society. Yet in recent years, the rise of social media has systematically shortened the time horizons within which we operate. And I don’t mean in a Buddhist sense. This underscores why it’s so important to pause and reflect on how our daily actions shape our future, and whether they truly align with our goals and values.The key to navigating this is to start thinking like an investor in your own life. Because, in the end, your most valuable asset is time — and how you choose to invest it will determine the future you create.