If you haven't taken the analytical versus intuitive thinking mode Cognitive Reflection Test (CRT), you should do so at the PART I posting before continuing here.
Consider these two questions:
Which of these payoffs would you pick?
Receive $3,400 this quarter or $3,800 next quarter?
You order a book from Amazon.com that will arrive in five days. How much would you be willing to pay to receive the book tomorrow?
In this posting, we explore the relationship between analytical and intuitive thinking mode and financial patience.
Note that the return from $3,400 to $3,800 is 11.8% in only three months! That is 56% compounded on an annual basis. Thus, the cost of being impatient is quite high. The choices from a sample of financial planners were:
Notice that the analytical planners overwhelmingly selected the patient option ($3,800). A slight majority of the intuitive planners picked the impatient option ($3,400). Shane Frederick found in his much larger sample of a broader section of the population that 60% of the analytical people took the patient option while only 35% of the intuitive people did. More intuitive and analytical planners picked the patient option than in Frederick's general population. Presumably this is because investment professionals understand the implied investment return better.
How much would you pay to get the book tomorrow? The average amount from Frederick's intuitive people was $4.54. The analytical people would only pay $2.18. The difference was even great in my sample of financial planners.
Whether considering payments over time or paying for speedy delivery of a book, intuitive thinkers have less patience than analytical thinkers.
Is it better to be patient or impatient from an investment perspective?
(See Shane Frederick, 2005, "Cognitive Reflection and Decision Making," Journal of Economic Perspectives, 19(4), pages 25-42 and John Nofsinger and Abhishek Varma, 2007, "How Analytical is Your Financial Advisor?" Financial Services Review, 16(4), 245-260.)
