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 health, both mentally and physically, our performance, both mental and physical, and even our investment decision making. Everyone has missed out on sleep from time to time taking care of a sick kid, preparing for a test or project at work, or just a late night our with friends. Some of us have even made it a regular habit and convinced ourselves that we don’t need that much sleep in the first place. We’d be wrong.
How does a lack of sleep impact us?
According to a massive two year study completed by the National Sleep Foundation the average adult needs 7-9 hours of sleep a night. That amount is even higher for teenagers (8 – 10 hours) and younger school age children (9 – 11 hours). The growing amount of research centered around the impact sleep quality and quantity has on our lives sheds light on massive 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
- Increase in unsafe behaviors among adolescents including drug use and risky driving
- Increased risk of injury and slower recovery in athletes
- Harms memory and cognitive function
- Linked 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 6 million times and touches on most of the risks we detailed above. The point is that a lack of sleep is highly correlated to a whole host of problems, including our views of risk taking. This is where it crosses over into the financial world.
How does a lack of sleep impact our risk tolerance?
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 earlier this year 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 more hasty 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 opted out of taking group life insurance at work, not because you didn’t need it, but because the likelihood of you passing away seemed low at the time. Conversely, you purchased a supplemental cancer policy you really don’t need because a family member was recently diagnosed. In short, this isn’t a constant state you want to be in.
One suggestion is to be mindful of how much sleep you are getting when you know you have to evaluate or make important financial decisions. Don’t decide to refinance your mortgage, trade your investments, 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.