Thinking Long and Short

Long term or short term

The Idea | Why do some people, politicians, and businesses prioritize short-term strategies or long-term strategies over the other?  What are the ethical implications of short and long-termism?  And how do we calculate the proper balance of short-term vs. long-term thinking in our own lives?

| Business | In the midst of several recent business and political conversations about the practical and ethical implications of long vs. short term thinking, I thought it would be useful to explore some of the ways in which these modes of practice manifest themselves.

The Q2 2017 edition of McKinsey and Company’s “McKinsey Quarterly”, provides the results of new research into the “economic impact of short-termism”.   The renowned global management consulting firm utilized an internally developed index of 615 large and midcap companies to analyze the performance of companies that prioritized long-term oriented objectives.  The results of their analysis demonstrated that short-termism is on the rise and that companies that were classified as long term oriented outperformed short-term companies across a range of key metrics.  Notable findings of the analysis are as follows:

  • Short-Termism is On the Rise – Scores in the McKinsey Index have skewed towards the short-term over time.  Short-termism has increased since the 2008 recession and “largely continued to increase ever since”.  Idea-intensive industries such as software and biotechnology are the most long-term oriented while the automobile and chemical industries are the most short-term focused. 
  • Long-Term Companies Perform Better and Invest When the Going Gets Tough The cumulative revenue of long-term oriented companies grew on average 47% more than short-term peers from 2001-2014.  Economic profit was 81% higher on average and market capitalization grew $7 billion more at long-term companies by 2014.  Interestingly, although long-term companies were more susceptible to declines in market capitalization during the financial crisis, their share prices recovered faster after the crisis abated.   
  • Long-Term Companies Contribute More to the Economy – Those companies that focused on long-term objectives added 12,000 more jobs on average from 2001-2015.  Indeed, the long-term approach added $1trillion more in US GDP over the past decade alone. 
McKinsey Findings
McKinsey Quarterly 2017 V2, “Measuring the Economic Impact of Short-Termism”, Exhibit 2, Source: S&P Capital IQ: McKinsey Global Institute Analysis

The authors conclude that the evidence shows that short-term thinking is rising, it is harming business performance and the US economy, and that the success of corporations and countries depends on increasing long-term oriented thinking.  

|Politics | In politics, the current President recently made the decision to pull the United States out of the Paris Climate Accord.  The climate accord in short, is an agreement between 195 nations in which each agreed to take action to address greenhouse gas emissions, adaptation, and climate financing.  President Trump argued that the deal was bad for America by putting a large amount of the emission reduction burden on America while reducing our economic competitiveness at the same time. 

I began thinking about this particular climate debate and the climate debate more broadly as a bifurcation of short vs. long-termism.  Does President Trump and those that oppose action on climate change prioritize or value short-term priorities?  For this side of the argument, does looking out for the immediate interests of workers in industries affected by greenhouse emissions reduction trump the benefits of those affected by a warmer planet in the future?  Conversely, for proponents of stronger action on climate, is it  morally desirable to optimize the benefits for a greater number of individuals in the long-term at the expense of  harming the quantity of available jobs or cost of living to individuals in the short-term?  And while individuals can quibble with my characterization of the climate debate, for the sake of argument let us grant the basic foundation of these two competing arguments and analyze the merits of both. 

For Climate Short-Termers’ (CST), there is a legitimate, compassion oriented underpinning to their argument.  These individuals value the livelihoods of workers and consumers who may be adversely affected by the effects of measures to reduce climate change in the immediate future.  Significant changes in the American economy would leave workers in affected industries disaffected and could increase the price of energy, a major source of discretionary income for middle and low wage Americans.  This side goes onto argue that the productive value of such dramatic changes to curb global warming are highly unknown given the uncertainty of climate models and complexity of the climate.  It therefore follows that inducing harm in the short-term is a bet that they are unwilling to take.

Climate Long-Termers’ (CLT) on the other hand, argue that the very fate of the planet is at stake if we fail to take dramatic action now.  They argue that the very nature of human civilization is on the line and that prioritization should be given to ensuring its continuation at the expense of short-term disruptions.  CLT’s therefore value the interests of the human enterprise in the long-term, whereby more people benefit for a longer period of time even if it means sacrificing the prosperity and positive experiences of a few in the short-term. 

So, which side is right on the merits and what side has the moral and ethical upper hand? 

The scientific evidence supports the notion that climate change is doing irreparable harm to the planet and that action to curb greenhouse emissions is generally warranted.   The question becomes what type of action, with whom, and how do we reduce the negative effects of such actions in the interim?   This is where a long-term vs. short term calculation is worth considering. 

| Personal Long-Term vs. Short-Term Calculation | The framework that I use for thinking long and short is the “70/30 rule”.  Which is to say, that roughly 70% of our decisions should be focused on long-term considerations that enhance our country, businesses, families, and personal well-being.  These decisions attune to the “narrative” self  in which our inner-voice, the spirit that continually guides us in the direction of our long-term and often altruistic intuitions takes precedence over the “feel-good self”.  These intuitions take the form of studying for a certification that will earn us more money, eating fruit instead of a bagel at breakfast, or uncomfortably disciplining a child in the interest of their long-term behavioral habits.   Deliberately making choices that are in the long-term interest of the business or family, even at the immediate expense of an individual worker or mood of a child, should take precedence 7 out of 10 times.  

For businesses, while Wall Street continues to demand quarterly earnings that meet or exceed expectations, corporate leaders should prioritize the longevity and market competitiveness of a business over the next earnings report.  Easier said than done – but being ordinary is always easier than being extraordinary, right?

At the same time, we must also take time to enjoy life now.  My  recent adoption of mindfulness meditation continually reminds me to appreciate the here and now and warns against the danger of perpetual pessimism about the future.  And this is true – we must take time to be present day by day, hour by hour, minute by minute.  Celebrating a child’s soccer game victory or a professional promotion at work should always be a priority.  Chocolate cake for desert is not a sin every now and then.  However, these short term indulgences should be tempered and enabled by disciplined, long-term decision making.  They should be exceptions rewarded by the regular order of long-term oriented choices.  We should embrace hard over easy.  We should be purposeful about carving more space for the greater good over the sugar high of the immediate,  semi-good. 

| Key Takeaways |

  • Short-Termism is on the rise in corporate America 
  • Companies that act in the long-term interest of their businesses perform better and contribute more to the US economy
  • The climate change debate can be framed as a long-term preference vs. short-term preference
  • CST’s value the interests of individuals in the short-term and seek to avoid disruption and harm at the expense of potential long-term damage
  • CLT’s value the interests of individuals and the broader enterprise in the long-term at the expense of individuals in the short-term
  • The “70/30” rule is an effective framework for exercising long-term decision making vs. short-term decision making in business, politics, and in our personal lives. 
  • 70% of our decisions should align with our “narrative” self – what is best for me over time?  30% of our decisions should allow for immediate pleasure or gains. 

As always, I invite your thoughts and experiences on this important discussion.  Please feel free to add comments or email me at jkarabias@gmail.com.