A recent article in Morningstar discusses how investors can use the laws of psychological distance to their advantage.
Psychologically, the article explains, “things that feel close take up more mental space and involve more detail, while things that feel far off are fuzzier less formed and contain fewer details.” It cites a study conducted by a team at UCLA regarding the effects of this concept on personal savings that suggests, “the closer you feel to your future self, the more likely you are to make good long-term financial decisions.”
What does this have to do with investing? “Everything,” the article says: “Investing is emotional. There are the highs of great returns, the lows of losing, and all the emotions that go along with trying to choose where to put your money.” Psychological distance, it says, plays a role in our “mental cost-benefit analysis and you would be wise to use it to your advantage rather than let it lead you into a trap.”
The article concludes that this so-called present bias “magnifies the importance of the immediate when compared with the future, and it leads plenty of brilliant folks unwittingly down the wrong path. Learning to see the close-up through a third-person perspective can help you respond more coolly to otherwise emotionally heated situations.”