By Brendan M. Crews, Authorized Representative, AVMA Trust
One of the biggest hidden influences on our day-to-day lives is the amount of sleep we get. Getting the right amount and type of sleep is critical to our mental and physical health and performance. It also can affect our investment decision making – including the decisions we make about our finances.
Everyone has missed out on sleep from time to time. It’s easy to lose sleep when we are feeling sick, preparing for a test or project at work, or just enjoying a late night out with friends. But some of us have made a habit out of missing sleep – and we’ve even convinced ourselves that we don’t need that much sleep in the first place. Guess what? We’re wrong.
How does a lack of sleep affect us?
According to a two-year study completed by the National Sleep Foundation, the average adult needs 7 to 9 hours of sleep a night. That amount is even higher for teenagers (8 to 10 hours) and younger school age children (9 to 11 hours). The growing research on the effects sleep quality and quantity have on our lives sheds light on the implications of neglecting adequate sleep. Here are just a few:
- Increased risk for cardiovascular disease and coronary heart disease
- Decreased glucose tolerance and increased risk of weight gain and type 2 diabetes
- Increased findings of clinical depression and anxiety
- Increased risk of certain types of cancer
- Increased incidence of unsafe behaviors among adolescents, including drug use and risky driving
- Increased risk of injury and slower recovery in athletes
- Harm to memory and cognitive function
- Potential link to earlier onset and progression of Alzheimer’s disease
Dr. Matt Walker, one of the world’s leading researchers on sleep, gave a Ted Talk on sleep that has been watched over 13 million times and touches on most of the risks we list above. The point is that a lack of sleep is highly correlated to a whole host of problems, including our views of risk taking. That is where poor sleep crosses over into the financial world.
How does a lack of sleep affect our tolerance for risk taking?
Everyone has a different tolerance for taking risks in their financial life. Unfortunately, not getting enough sleep can distort yours. A research paper published in the Review of Financial Economics reported the link between sleep and risk aversion and related characteristics like time discounting in financial decision making.
“The results show that individuals who have poor sleep assessed by the Sleep Index have greater distortion of probability, a stronger present bias, and a higher discounting rate. Similarly, subjects with poorer self‐reported sleep quality have a higher distortion of probability, a more linear utility function, and are less loss averse. Furthermore, individuals with more sleep disturbances have a greater distortion of probability and a more linear utility function.”
What this means is that when we are deprived of sleep quantity or quality, we may take on more risk than we otherwise would, be hastier in our financial decision making, and put too much weight on what is happening currently rather than other possible future outcomes. For example, have you ever made a rash online purchase late at night that you later regretted? Perhaps you opt out of taking group life insurance at work, not because you don’t need it, but because the likelihood of you passing away seems low at the time. Conversely, you purchase a supplemental cancer policy you really don’t need because a family member was recently diagnosed. In short, it isn’t a constant state you want to be in.
So what’s the bottom line? Be mindful of how much sleep you are getting when you know you must evaluate or make important decisions, including financial ones. Don’t decide to refinance your student loans, accept a job offer, or make large purchases when you know you haven’t been getting enough sleep. Put yourself in a position to succeed. Your health and your financial future demand it.