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DISCUSSION PAPER PI-1403

Mental Time Travel and the Valuation of Financial Investments

David Blake & John Pickles

ABSTRACT

We portray the valuation of financial investments as mental time travel. In a series of thought investments, a $1 invested in an investment fund is projected forward in time and then discounted back to the present, both exponentially and hyperbolically. These thought investments feature symmetric valuation (in which discount rates match projection rates) and asymmetric valuation (in which discount rates and projection rates differ). They show how asymmetric valuation results in differences between personal value and market value and between a closed-end investment fund's net asset value and its market value. We explore possible reasons for asymmetric valuation.

Keywords: mental time travel; time discounting; expectations; perceptions; time preference; risk preference; closed-end fund puzzle; market valuation; personal valuation.