Want to be rich? Be patient. | Fin24

Want to be rich? Be patient.

Dec 18 2017 12:29
Johan Fourie

Johan Fourie is associate professor in economics at Stellenbosch University.

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On 15 August 1248, the Archbishop of Cologne, Germany, laid the foundation stone of a cathedral (largely funded by civil society) that would take 632 years to complete. 

How is it possible that a community could fund the construction of a building that neither they, nor their children or grandchildren, would ever see completed?

Patience is a virtue, says a fifth-century poem, but economists are increasingly confident that it’s also a key building block of economic prosperity. 

Two concepts are of relevance. The first is to what degree you consider the future in your decision-making – your time preference. 

The second is the period of time that is relevant for you current decision-making – your time horizon. 

Patient people tend to have a high time preference and long time horizon. 

And, as more and more experimental evidence now show, so do successful people.

The study of patience was made famous by the Stanford marshmallow experiment. In the late 1960s, Walter Mischel offered children a choice between a small reward like a marshmallow immediately or a larger award (two marshmallows) if they waited 15 minutes. 

Some children immediately grabbed and swallowed the marshmallow. Others waited a while, and then had a bite. 

But several waited diligently until the 15 minutes had passed for their second marshmallow. 

Follow-up studies showed that children who were able to wait for the higher pay-off were also more likely to have better school outcomes, body mass index and other life measures.

Is patience the result of genetic inheritance or environmental influence? In a 2007 Journal of Public Economics, Eric Bettinger and Robert Slonim found that parents’ patience is uncorrelated with their children’s, questioning the belief that it’s only nature at work. 

They also found that mathematics scores and whether a child has attended a private school were uncorrelated, suggesting nurture’s influence is also limited. 

Most studies find that girls tend to be more patient than boys. This has important implications for motivating children. Girls are more likely, for example, to respond to student performance incentives. 

Knowing what determines patience can go a long way in helping kids perform better at school, and achieve better life outcomes.

Does patience matter at societal level? Global surveys now ask questions that allow us to deduce some measure of time preference or time horizon. 

The results suggest that while these generally correlate positively with GDP per capita, it’s not always the case. Citizens of Botswana and Kenya, for example, are more patient, on average, than those of Japan and France. (South Africa is very close to the world average.) 

Patience also varies across time. At a conference at Stellenbosch University during November, Jan Luiten van Zanden and Gerarda Westerhuis of Utrecht University presented a paper on how time preference has changed across the last few centuries. 

They argue that, during the Middle Ages in Europe, the ‘future’ became more important, in other words, people’s time preference increased. 

Saving and investment therefore increased, and people started to accumulate capital with long time horizons. (The construction of the Cologne Cathedral is an example.) 

Why that is remains somewhat of a mystery, but there are clues in the changing (religious) beliefs and institutions of the time. Consider the emergence of corporations, initially religious institutions and guilds but later companies, notably the limited liability company, which would transcend the life of shareholders. 

The rise of big business followed in the late 19th and early 20th century, where salaried managers now focused on long-term value creation.

Van Zanden and Westerhuis argue that this trend has reversed in the last few decades. Since the 1970s, ‘short-terminism’ is increasing, reflected in the focus of short-term value for shareholders (and performance-related pay for managers). 

One factor that might explain this is the shift from modernism to post-modernism. Modernists believed that the future could be changed, for example, through strategic planning in a business environment or (in the case of the Soviet Union) even an economy. 

The rise of post-modernist beliefs – that reality cannot be known and the future cannot be predicted or changed – has shifted our long-term gaze to the present. Instant gratification, exacerbated by social media, is now the order of the day.

There are valid reasons to question these preliminary findings. Companies like Alphabet, Apple and Facebook seem to be able to invest in new technologies where the pay-offs are only likely to be in the medium to long run.

But it’s difficult to imagine that we invest in something that we won’t see the end of: perhaps that is why tackling climate change is so difficult!

Time preference and time horizon remain vastly understudied topics. We know that time preference matters at individual level; more patient people are more “successful” later in life. 

What we don’t know is why they are patient, and how to improve our impatient natures.

Similarly, we know that some societies, at certain times in history, had a longer time horizon. Those societies were then able to invest and accumulate, improving the prosperity of the generations to follow.

Consider this: children born in 2018 are likely to live to 2100. Are our political and business leaders factoring the year 2100 into their long-term strategies? Unlikely. 

Perhaps we need a bit more of the long-term horizon the inhabitants of Cologne had 632 years before completing their cathedral.

Johan Fourie is associate professor in economics at Stellenbosch University.

This article originally appeared in the 14 December - 17 January edition of finweek. Buy and download the magazine here.


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