Patience

Homo Sapiens may have the most developed ability for patience due to the pre-frontal cortex of the brain. It is key to self-control and patience in humans. The pre-frontal cortex develops with age, being least developed in small children, hence the more emotional responses exhibited. Patience is likely a necessary condition for reasoning. It allows the effectiveness and reliability of communication by giving communicators the ability to argue their claim, be heard and have thoughtful responses be presented and considered. That is why it is harder to reason with a child. While humans assume reason is based on rationality and truth, intelligent points can be made using nonfactual information. This may be done deliberately to achieve a particular outcome, often which may benefit those putting the nonfactual argument forward.

Patience noun. the quality of being patient, as the bearing of provocation, annoyance, misfortune, or pain, without complaint, loss of temper, irritation, or the like. an ability or willingness to suppress restlessness or annoyance when confronted with delay.  https://www.dictionary.com/browse/patience

The following is freely sourced from “Patience and Finance”, Andrew G Haldane Executive Director Financial Stability, Bank of England

http://www.bankofengland.co.uk/publications/speeches/2010/speech445.pdf

 Given at the Oxford China Business Forum, Beijing 2 September 2010

 In the East, it is said:

“One moment of patience may ward off great disaster

One moment of impatience may ruin a whole life”

[Chinese Proverb] 

In the West, it is said:

“I often make more money when I am snoozing than when I am active”

[Warren Buffett] 

In his Theory of Moral Sentiments (1759), Adam Smith declares: 

“The qualities most useful to ourselves are, first of all, superior reasons and understanding, by which we are capable of discerning the remote consequences of all our actions; and, secondly, self-command, by which we are enabled to abstain from present pleasure or to endure present pain in order to obtain a greater pleasure in some future time”. So for Smith, patience was both a distinctive and valuable human commodity. Subsequent research has shown he was right. Patience is peculiarly human. Our nearest evolutionary relatives, discount almost entirely outcomes more than one minute into the future. It is not that animals are incapable of far-sighted behaviour – for example, squirrels collecting nuts or birds flying south for the winter. But these are not acts of spontaneous self-control, like saving or dieting. Rather, they are genetically pre-programmed. The squirrel does not store food as a dietary device. 

Neo-Classical growth model in economics provides a simple link between patience and development. Patience generates savings by households which in turn finances investment by companies. And capital accumulation by firms, growth theory suggests, is then the prime driver of future output. 

In the subsequent period, patience brought prosperity. Between 50,000 BC and 1000 AD, world GDP per capita rose around 50%, at an annual growth rate of 0.00072%. Economists today would classify that as anemic. But, at the time, it must have felt like a Golden Age. In the subsequent millennium, world GDP per capita has risen 50- fold, at an annual growth rate of around 0.4%. Much of that growth has been since 1750 AD, since when world GDP per capita has risen almost 37-fold, at an annual growth rate of 1.4% per annum.3 It is difficult to imagine patience not having hastened this dramatic journey. 

Behavioural economists, such as Thaler and Shefrin, has formulated the two selves as the patient “planner” and impatient “doer”. Using brain imaging, this model has recently been given neurological support. While patient behaviour is associated with activity in the pre-frontal cortex, impatient behaviour is associated with a distinct part of the brain - the limbic (or midbrain dopamine) system. 

Take happiness. Studies have shown that happy people save more and spend less.Happy people also take longer to make decisions and expect a longer life. In short, they are patient. These patterns of behaviour are connected and reinforcing. Expecting a longer life, happy people defer immediate gratification and save. In consequence, they enjoy a more prosperous tomorrow as they harvest the fruits of their investment. In these models, happiness is not just fulfilling; it is self-fulfilling. 

Just as patience can self-generate, so too can impatience. And while patience generates self-improving cycles, its alter ego can create self-destructive cycles.

Addiction is the classic self-destructive cycle. Drugs and alcohol chemically alter the balance of the double-self, increasing the value of instant gratification. This shortens time horizons, increasing further the value of instant gratification in a downward spiral. Unless arrested, this unfulfilling equilibrium becomes self-fulfilling. 

While self-improving cycles shape individual behaviour, they can also have broader social consequences Sociological contagion has been found in studies of happiness, exercise and dieting. It may have a neurological explanation, as imaging suggests we often incorporate friends’ views and attitudes into our brains as if they were our own. 

Just as patience can self-generate, so too can impatience. While patience generates self-improving cycles, its alter ego can create self-destructive cycles. 

As patience is contagious, impatience is infectious. 

Most traders’ brains harbour the impatience gene. 

With a large fraction of momentum traders, prices deviate persistently from fundamentals. Among untested investors, momentum strategies now flourish while long-term fundamentalists fail. The speculative balance of investors rises, increasing the degree of misalignment in prices. The patience gene falls into terminal decline. Natural selection results in a self-destructive cycle, as with drug, alcohol and food addiction. 

Market prices in this model are buffeted by two winds. Momentum-based speculators cause deviations from fundamentals, while long-term investors drive prices back towards fundamentals. These are the double-selves of the financial brain, the patience and impatience genes. 

John Maynard Keynes quipped: “markets can remain irrational for longer than you or I can remain solvent”. In the sketch model, a Keynesian dynamic selection process is at work. Myopic finance bankrupts the long-sighted. 

English financier Sir Thomas Gresham in the 16th century, this refers to the tendency for bad money to drive out good. 

The first paper money example of Gresham’s Law pre-dated Gresham. It came from China during the Yuan (1271-1368) period. Then, paper money drove out silver coinage. This bad money dynamic has since been replicated across many monetary economies. China also provided the world with its first example of the reverse phenomenon – a self-improving cycle of good money driving out bad. During the Ming (1368-1644) dynasty, paper money was swept away by commodity money. 

Liquidity unlocks the impatience gene. Investors whose judgement is wrong, but whose timing is right, can lock in immediate gains. Liquidity, too, can pollute the gene pool by allowing the impatient to prosper. Like information, liquidity can be too much of a good thing.  This dual self-world is structurally schizophrenic: financial innovation is both good and bad; information is both solution and problem; liquidity is both cure and curse; investors are both abstemious and addicts. 

One source is the enormous literature on financial market efficiency. If markets were efficient, asset prices would mirror fundamentals. This would be indirect evidence against impatience, which tends to cause prices to deviate persistently from equilibrium. They are: Excess volatility, Serial correlation, Equity premium, required yield on equity over safe assets, discount rates used to value firms, and to evaluate projects, appear to be consistently higher than can be explained by fundamentals, a finding consistent with short-termism in investment. 

In general, people dislike goods price inflation, but like asset price inflation. Higher goods prices cut today’s disposable income. Higher asset prices cut tomorrow’s disposable income. 

Studies have found that future cash flows are undervalued by investors. These effects compound over time. So, if cash flows 5 months ahead are undervalued by 5% today, those occurring 5 years ahead are undervalued by 40% today. 

CEOs positions are likely to be particularly at risk from short-term performance evaluation in capital markets. And as with holding periods for financial investments, CEO tenure patterns have changed strikingly over recent decades. (Individual performance evaluations have also shortened.)

In 1995, the mean duration of departing CEOs from the world’s largest 2,500 companies was just less than a decade. Since then, it has declined. By 2000, it had fallen to just over 8 years. By 2009, it had fallen to around 6 years. This pattern is replicated across regions but is marked in North America and non-Japan Asia.  

Just as patience can ward off great disaster, impatience can ruin a whole life.    

From http://financialedge.investopedia.com/financial-edge/0810/7-Millionaire-Myths.aspx

Millionaires are people who live within their means, budget, and spend wisely, and focus on financial independence first. These are habits that take discipline, but ones we can all adopt to begin growing wealth. ©