Recently I have been pondering the benefits of long-term thinking for business and policy, and what drives short-term, immediate gratification behavior.
I think there are a few reasons why we continually make important decisions based upon short-term results instead of the long-term gain. The first, and most obvious, is the selfish aspect of immediate gratification. In the political arena, government officials are incentivized by the need for reelection to put public funds towards projects with immediate paybacks. However, I think these are commonly analyzed and well-known issues that only graze the surface of a complex problem, there are deeper issues at stake here.
It comes down to risk, we see long-term investments as high-risk. Businesses tend to evaluate investments in a 20 year time-span, occasionally longer but not often. An investment’s rate of return is calculated out in excel models to 20 years. It is assumed that everything beyond 20 years is either a) unknown or b) of little affect because of the discount rate aka time-value-of-money, thus anything beyond 20 years cannot be accounted for therefore any return must happen in a smaller timeframe. When this thought process is applied to a public sector budget, it kills the allocation of funds towards long-term problems, such as health, education, and the environment. These three issues are all essential for the long-term survival of our society and species, in addition to being important investments in our children and the coming generations. However, because they do not turn an immediate profit, they receive relatively small investment compared to other areas of government budget.
I would commend one company that recently surprised me by brazenly acting in the long-term commercial interest, Google. Google’s recent announcement about their drive-itself car is an astounding show of R&D without immediate commercial gains. Google has stated that they do not expect too see a return on their investment for more than 10 years, but nevertheless, they went forward and made strides towards new innovation with a long-term plan. It is a testament in this fact-paced world that a mere decade is seen as ambitiously long-term in the private sector.
When thinking about our personal lives and decisions, risk mitigation continues to play a major role. I propose that we make decisions for short-term gain becuase we are unable to empathize with ourselves in a timeframe that is greater than ~20 years. Our own impermanence inhibits us from being able to envision ourselves that far in the future, and therefore we choose to reap benefits for our nearer selves than our distant selves. This echoes the issues with businesses and balance sheets, in that we see the risk of the unknown as too high in the 20 plus timeframe. We might die, we might move, anything could happen and we might not receive the return on our investment. I would challenge this line of thought.
Long-term investments can be low-risk investments. Education, environment, health, these are long-term investments that will show society-wide benefits. These are low-risk because the alternative, not investing, is catastrophic. If we cut back on our education budgets we end up with a less competitive society. If we continue to emit greenhouse gasses, we put our planet, and in turn ourselves, at high risk. And just like your mother told you, if you eat your vegetables and live a healthy life, you will have less-risk of high-cost and potentially traumatic health issues later in life. Mutually, you will be a larger benefit to society, yourself, and your family due to a healthier existence as well as a statistically probable prolonged life. Thus, I would argue with the meme that long-term investment is high-risk for self and society. From a societal and business standpoint, it is imperative that we make what feels like a sacrifice in the present to ensure an improved and continued existence in the future.