Patience Is a Virtue: In Value Investing*

• Author: Klaus R. Schenk‐Hoppé,Thorsten Hens
• DOI: http://doi.org/10.1111/irfi.12251
• Date: 01 December 2020
• Published date: 01 December 2020

Patience Is a Virtue: In Value

Investing*

THORSTEN HENS

†,‡,§

AND KLAUS R. SCHENK-HOPPÉ

§,¶

†

Swiss Finance Institute, Department of Banking and Finance, University of Zurich,

Zürich, Switzerland

‡

Faculty of Economics and Management, University of Lucerne, Lucerne, Switzerland

§

Department of Finance, NHH-Norwegian School of Economics, Bergen, Norway and

¶

Department of Economics, School of Social Sciences, University of Manchester,

Manchester, UK

ABSTRACT

This note illustrates a simple but important insight for financial investment.

In a heterogeneous agent-based evolutionary finance market model with

long-lived assets, markets are stable if clients of fundamental (“value”) invest-

ment funds are more patient than clients of other funds.

Accepted: 21 November 2018

I. INTRODUCTION

Recent stock market crashes have made market stability a central topic of investors

and policy-makers alike, asking for advice from academia. However, academic

research is divided about the cause of these severe mispricings. In particular, the

importance of the heterogeneity of investors is debated. While Franke and Lüders

(2010) show that in traditional rational expectations models heterogeneity of

investor preferences decreases market stability, behavioral finance models like

those outlined in Shiller (1999) and Shleifer (2000) show that irrational investors

(e.g., trend chasers or noise traders) cause instability and mispricing. This

diversity–stability debate in finance is akin to biological models of interacting spe-

cies (McCann 2000). In this note we show that in a standard heterogeneous agent

financial market model mispricing is smaller if fundamental investors are more

patient than other investors. Thus within this model the diversity–stability debate

comes to the same conclusion as the behavioral financial market models.

Patience is widely praised as one of the keys to investment success (and impa-

tience as the main source of failure) in investment books such as Malkiel’s (2016)

A Random Walk down Wall Street: The Time-tested Strategy for Successful Investing

(first published in 1973 and currently in its 11th edition) or The Little Book of

Common Sense Investing by Bogle (2007), the father of index-investing.

* Financial support by the URPP Finreg of the University of Zurich is gratefully acknowledged.

© 2018 International Review of Finance Ltd. 2018

International Review of Finance, 20:4, 2020: pp. 1019–1031

DOI: 10.1111/irfi.12251