Mental time travel and the valuation of financial investments

David Blake and John Pickles

Review of Behavioral Finance, 2021, vol. 14, issue 3, 327-344

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.

Keywords: Mental time travel; Time discounting; Expectations; Perceptions; Preferences; Closed-end fund puzzle; Market valuation; Personal valuation; G4 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eme:rbfpps:rbf-06-2020-0133

DOI: 10.1108/RBF-06-2020-0133

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