Time Horizon

In The Psychology of Money, time horizon is the hinge of the chapter on bubbles. Morgan Housel’s argument is that investors innocently “take cues from other investors who are playing a different game than they are,” and that “when investors have different goals and time horizons—and they do in every asset class—prices that look ridiculous to one person can make sense to another, because the factors those investors pay attention to are different.” Bubbles form “when the momentum of short-term returns attracts enough money that the makeup of investors shifts from mostly long term to mostly short term,” and they do their damage “when long-term investors playing one game start taking their cues from those short-term traders playing another.”

The chapter’s takeaway is that “few things matter more with money than understanding your own time horizon and not being persuaded by the actions and behaviors of people playing different games than you are.” The book also notes the deeper difficulty: it’s “hard to make enduring long-term decisions when your view of what you’ll want in the future is likely to shift” — you may not know today what you’ll even want later.

Context: Time horizon is a standard concept in investing and personal finance — the length of time an investor expects to hold an asset before needing the money — which determines appropriate risk tolerance and which signals (valuation versus momentum) are relevant.

Where this appears

• The Psychology of Money — the bubbles chapter argues investors with different time horizons are “playing different games,” and that knowing your own horizon is the key defense against being swept up.