Friday, February 19, 2010

Why do we focus so much on short-term gains these days?

In David Brook's column yesterday, he made a striking point regarding a shift in culture that has influenced more and more people to focus on short term gains rather than long term sustainability (this is one of many points criticizing the modern power elite). Brooks argues that back in the days of wasp-y blue blooded business leadership, people remains focused on long-term profitability in order to keep a kind of family or business legacy afloat for generations afterwards. Today however, more and more "average" and diverse Americans can ascend the business social hierarchy based on their talents, so the incentive to maintain a legacy (and thus long term sustainability) is nowhere near as prevalent as it once was. He argues:
Fourth, time horizons have shrunk. If you were an old blue blood, you traced your lineage back centuries, and there was a decent chance that you’d hand your company down to members of your clan. That subtly encouraged long-term thinking.
Could Kahneman and Tversky's finding on prospect theory give us any insight to why such a shift has occurred? Looking at the curvilinear value function, it can be implied that the leveling out of value for gains would support preference for focusing on larger short-term gains, rather than sustained long term growth, even if sustained long-term growth would overall give higher monetary returns over time. Since prospect theory shows that people tend to overweigh events with small probabilities of occurrence, this helps to explain why riskier short-term investments and business decisions have become more rampant over the past 60 years.

So this gives some perspective, from a psychological standpoint, why people can be more risk-loving than rationality would dictate them to be, but what about those old blue bloods? Were they just more rational than people are today? Probably not, but their incentives were aligned much differently. Today, with enough hard work (and maybe a bit of coercion) it is in fact quite possible to go to an Ivy League and become a slick Wall Streeter, even if your family lacks any legacy at all. The rub of this egalitarian shift however, is that while greatly expanding the pool for talent and intelligence, it also creates a kind of over abundance in the "market for elites". That is, people will focus on making short-term risky profits because they never know when the next MBA-clad hot shot will come and take away their place in the top echelon of society. 

Of course, one cannot blame just culture and expanded opportunity for minorities for this- the fast pace of technology and global competition also play large roles in the expansion of upward social mobility and drive for fast profits in business. But now, how do we redraw incentives to support both diversity, opportunity, and equality in leadership and business while simultaneously encouraging long-term sustained growth?

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