13 Sep Short-termism and its devastating effects
Jean-Luc Gravel, member of the Blue Bridge investment committee
What do the state of infrastructure, smoking, climate change, junk food, excessive debt, and stock exchange speculation all have in common? They are all handicapped by short-termism and the quest for instant gratification. The more these behaviours are adopted or maintained, the more problems are kicked down the road and aggravated. It’s like a leaky roof. While smoking and junk food, among other things, are very satisfying in the short term, they clearly have devastating long-term health effects.
Walter Mischel, a psychology researcher at Columbia University, admirably illustrated the allure of instant gratification in the 1960s with “The Marshmallow Test” (YouTube link) that he gave to 550 five-year-olds over a period of several years. They had a choice between a marshmallow that they could have immediately or two marshmallows if they waited 15 minutes. Despite the mouth-watering offer, only about one-third of the children waited. Mischel saw that as an indicator of individuals’ ability to demonstrate self-control and maximize their long-term well-being. Indeed, the most patient children generally performed better academically, and they were healthier and financially better off. According to Mischel, self-control is, fortunately, a cognitive skill that can be acquired and developed.
So what’s the link with the state of infrastructure, climate change, excessive debt, and stock exchange speculation? In all cases, it’s easy to see the impact of our inability to make difficult short-term choices, which comes at a cost of devastating longer-term effects. For example, in order to properly maintain a road network, about 5% of its value should be reinvested annually; however, the actual figure is approximately 3%. Chronic underinvestment has led to the current pathetic condition of our roadways and congestion. Even subways, a desirable, environmentally friendly solution, have largely been neglected as far as maintenance goes.
Climate change is no exception. The comments an insurance company CEO made at a conference come to mind. He was rather pessimistic about solving this major issue, which requires two especially difficult things: A commitment to work together – just look at the state of the U.S. power grid – and the ability to think long term. We all know that the longer we wait to address issues related to global warming, the more difficult and costly it will become. Recent events such as Hurricane Katrina and the snowstorm in Texas, to mention just two, will only get worse. Even so, there is still a reluctance to price carbon to reflect the cost of polluting because it’s seen as putting the brakes on jobs and short-term economic growth.
It’s not difficult to establish a link between excessive debt and instant gratification: short-term gain, long-term pain. Assuming that current consumption cannot be financed indefinitely by borrowing, it’s easy to put a finger on the problem. When you think about it, excessive debt comes at the expense of freedom. Don’t get me wrong, I have nothing against investment-related credit that gives borrowers flexibility and credit is absolutely essential in our economic system. For example, borrowing to purchase a home may be an excellent decision. Borrowing to go on a tropical vacation, not so much. There is a need to be wary of excessive debt that fuels unnecessary, environmentally harmful consumption.
Stock exchange speculation is sustained by the same attributes. Look at the Robinhood platform that promotes instant earnings (commission-free trades) at the expense of investment, causing inexperienced small investors to lose big. Many investors’ long-term returns are well below the indices because they tend to overreact after significant market upturns (buy high) and panic after market downturns (sell low). The big winners are those who have a disciplined, long-term approach that’s consistent with a relatively low portfolio turnover.
Let’s hope that self-control is a skill that society can develop. The significant drop in tobacco use in North America over the past few decades is reason for hope. A large number of smokers came to associate cigarettes more with poison than with pleasurable experiences. Why can’t we do the same with other major issues? It’s a good idea; otherwise our future, the future of the planet and, especially, future generations will likely suffer.