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.

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.)

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

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.

• 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

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

Applying Principles of Investment Analysis To Life Decisions: Risk, Reward, and Time was originally published in Brain Labs on Medium, where people are continuing the conversation by highlighting and responding to this story.