Patience and Finance

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]

These observations have common conceptual roots. Underlying both lies patience. Patience, or its alter ego impatience, is a key factor shaping inter-temporal decisions. Whether to save or spend, trade or invest, work or quit, stick or twist. As such, patience has important implications for the evolution of economic and social systems. This paper considers the role of patience in decision-making, in particular financial decision-making. Patience is not static; it evolves. This paper brings together lessons from economics, history, psychology, neurology, sociology to assess patience and its implications for the evolution of economic and financial systems. Evidence from social and economic systems points to two evolutionary paths. Along one, patience becomes self-reinforcing. For example, financial liberalisation may encourage patience and improve inter-temporal choice, unlocking growth. But there is a second path, along which impatience is self-reinforcing. Financial liberalisation can also unlock impatience, generating over-trading and under-investment. These dual equilibria make choosing the right pace and path of financial reform crucial. Some countries, like China, appear to be proceeding along the patient path.The choice is how to pace reform to prevent overshooting onto the impatient path.
For countries which have already liberalised, the choice is how to promote patience while harnessing impatience. These are real public policy choices.

Patience and Impatience

Patience, we are told, is a virtue. That has been the verdict of theologians, philosophers and authors for well over 700 years. Interestingly, it was also the verdict of the earliest economists. 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.1 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. The Patience “Gene” The source of human self-command, or patience, appears to be neurological. Recently, this has become detectable using brain imaging technology. That suggests the pre-frontal cortex of the brain is key to self-control and patience in humans.2 The pre-frontal cortex develops with age, being least developed in small children. In other words, neurology has confirmed the suspicions, and frustrations, of generations of parents with impatient toddlers.

For the full speech see: http://www.bankofengland.co.uk/publications/speeches/2010/speech445.pdf