A constraint is, by definition, a negative thing. It limits options. It means you can not do something. If only I had more time… If only I had more money… If only…
But what if we looked at constraints a little differently? What if we viewed constraints in a positive light? Twitter would not be what it is today without its famous 140 character limit. Professional basketball would not be as exciting without the NBA’s 24 second shot clock. The essay you wrote in university probably would have never been completed without that three week deadline.
Investing is an area where I leverage the use of constraints. My company has a share option plan where they will match a percentage of what I contribute to our stock. The only catch is that the shares are vested for a few years, meaning that I could not sell them even if I wanted to during this period. Once I buy, I have no liquidity and no other options during the vesting period. But I love this constraint. I love knowing that I can not sell in the short term.
Barry Schwartz talks about constraints in “The Paradox of Choice.” The book’s thesis is the fact that some choice is good does not imply that more choice is better. In one section, Schwartz talks about the idea of making decisions non-reversible…
“Almost everybody would rather buy in a store that permits returns than one that does not. What we do not realize is that the very option to being able to change our minds seems to increase the chances that we will change our minds. When we can change our minds about decisions, we are less satisfied with them.”
Exactly. When we make our decisions non-reversible, we do not have the option to reverse our prior choices. The decision is binary – to buy or not to buy (that is the question). And if you do decide to buy, you do not have the constant option of being able to sell after you make the purchase.
Without constraints, we need discipline. And being disciplined requires making a choice. Should you hold on to your investment or should you sell? If you eliminate the option of being able to sell, at least in the short-term, you no longer have to make a choice because you have no choice. That’s the beauty of constraints – they limit our ability to take action by eliminating choices. And when investing for the long term, this can be a great thing. Most of us know how we should behave. The issue is not the lack of knowledge, it is the execution. Constraints restrict behavioral pitfalls in executing. They limit the potential for me to act in an irrational manner, and force me to think long term.
There are other examples of constraints that I take advantage of in the investing world. A RRSP (for Canadians, or a 401(k) for Americans) has penalties if you withdraw the funds before a certain age. There are a few caveats to this. For example, you can withdraw the funds if they are going towards certain purchases, like buying your first house, and technically you can sell holdings in your RRSP, as long as you are not withdrawing capital from your account. However, again, this constraint helps me think long term. Another example of a constraint in the investing world is with automatic contributions to investment accounts. On a specific date, every month, a certain percentage is automatically taken either from my paycheck or checking account and invested. This limits me from trying to time the market.
I think we need to learn how to embrace constraints more often, especially when it comes to investing. Because limits on what we can do are liberating, not constraining. A constraint truly can be a beautiful thing.