A Study Of Investment Decision-making By Financial Institutions Based On Intertemporal Choice

In the investment environment fraught with uncertainties, the financial institution which relies on timing strategy must have an unusual ability to foresee future trends which includes not only macroeconomic, corporate profits, market interest rates but also international economic, political and social development of capital markets. However, there is no evidence which shows that financial institutions have this extraordinary ability. Therefore, the timing strategy does not apply to all financial institutions. Asset allocation is the core strategy in asset management. Resources allocation is the core issue of economics research. Time is one of the core factors that affect financial decision-making behavior and plays an important role as the core factor. Essentially, the process of investment decision-making is to weigh between short-term returns and long-term gains. Inter-temporal choice is the process to weigh the benefits and costs in different times and make decisions. The common places between them provide a basis that we can use inter-temporal choice theory to analyze investment decision-making of financial institutions. In the market which restricts competition, institutional investors may limit other businesses and individuals access to their business areas. However, in a competitive market, economic profit comes from three sources:time preference, uncertainty and the abilities of financial institutions. Investment decision-making framework of financial institutions forms in the interaction between time preference, uncertainty and the abilities of financial institutions.Time preference is an important variable for the behavior of inter-temporal choice, different decision-makers has different subjective expectations about time value. Decision-makers who have strong time preference tend to perform short-term strategy, decision-makers who have a weak time preference tend to perform long-term strategy. For financial institutions, the size of the time discounting rate and its inconsistency depend on the institutional framework of the investment decision-making and decision-makers’ construal-level. The energy-efficient institutional framework of the investment decision-making can play the role of managing time preference and encourage long-term investment behavior, while limiting the impulsive decision-making behavior. To the contrary, when the institutional framework of the investment decision-making does not control time preference of financial institution, impulsive motives would dominate decision-making process and ultimately lead to that financial institutions deviate from its long-term investment route. Decision-makers’construal-level can significantly improve their ability which controls their time preference. Financial institutions can provide investors with "commitment mechanism" to achieve the interest consistency between financial institutions and investors. To the contrary, low decision-makers’ construal-level can easily lead to a lack of self-control in decision-making. When the financial institutions ignore the management of time preference, investment decisions will become unstable and incomprehensible. In the long run, optimizing the behavior of financial institutions’inter-temporal choice by managing time preference can significantly enhance the ability of financial institutions’asset allocation and the rate of investment returns.