Patience Is a Virtue: In Value Investing*

AuthorKlaus R. Schenk‐Hoppé,Thorsten Hens
Date01 December 2020
Published date01 December 2020
Patience Is a Virtue: In Value
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
This note illustrates a simple but important insight for nancial investment.
In a heterogeneous agent-based evolutionary nance 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
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 nance 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
diversitystability debate in nance is akin to biological models of interacting spe-
cies (McCann 2000). In this note we show that in a standard heterogeneous agent
nancial market model mispricing is smaller if fundamental investors are more
patient than other investors. Thus within this model the diversitystability debate
comes to the same conclusion as the behavioral nancial 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 Malkiels (2016)
A Random Walk down Wall Street: The Time-tested Strategy for Successful Investing
(rst 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. 10191031
DOI: 10.1111/ir.12251

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