06/01/2009
World - Stress shortens investment horizons
Investors under stress have a tendency to see less far into the future, and to shorten their temporal investment horizons, Michael J. Mauboussin of Legg Mason Capital Management claimed at a round table held on 11 December, from which extracts were published on the management firm’s website. ?Although they recognise that they should think in terms of a longer term, their stress encourages them to concentrate on what is happening here and now,? the document says.In a difficult environment such as the one which we are now experiencing, there is a chain reaction: the environment provokes stress; the investor shortens his or her temporal horizon, and modifies the portfolio more frequently; the investor undergoes more losses than he would otherwise suffer, according to the theory of loss aversion; and this increases the risk premium which the investor expects for new investments, which drives down the price of assets.