It is very hard to separate pure time preference from risk when it comes to real-world investments

From Short-termism by Arnold Kling. It is not uncommon for glib explanations to become a universal currency and the idea that many corporate and national issues are the result of too short a term perspective is one of those universal explanations that are passed mind to mind without anyone ever questioning its validity. Obviously there is always a tension between near term sacrifice and long term prosperity as there is between near term consumption and long term spartanism. There are cognitive and cultural biases that influence an individual's predisposition towards one view or the other.

Yes, executives are subject to much closer public and legal scrutiny than in the past. Yes, there are exacting laws requiring careful communication about near and long term prospects. And yes, the market is punishing when expectations are not met. But isn't this just part of the entire system of information exposure, vetting and processing? The future is an uncertain prospect and those prospects change all the time based on current new information.

My sense is that in many cases, "short-termism" is either a cognitive cliche covering a different issue - I believe they should be investing differently than they are. Fair enough, but what is it that you know that they, the executives, don't know that makes you so much more confident in your assessment of future returns?

Kling has some great observations and questions on this issue.

. . . He asked me what I thought about “short-termism.” Mostly, I think that it is a difficult concept to pin down.

I guess my working definition would be that short-termism is a bias among executives to forego long-term opportunities in order to achieve short-term profit objectives.

But how would you measure it? What observations would confirm it?

For example, I might argue that, at today’s low long-term interest rates, a nuclear power plant looks like a high net-present-value investment for a utility company. Does their failure to invest in nuclear power plants reflect short-termism? Obviously, it is more complicated than that. There are regulatory barriers, site licensing barriers, and there is economic risk–suppose that ten years from now solar power becomes so inexpensive that the price of electricity no longer provides a decent return on the up-front investment? Not to mention the risk that the plant will have something wrong, or that the nuclear waste will be a problem, or some other risk.

The point is, it is very hard to separate pure time preference from risk when it comes to real-world investments.

I think he is right to focus on definitions. What do we mean by short-termism and how do we distinguish it from appropriate time discounting based on assessed risks and uncertainty?

And this isn't just about executives of corporations. Short-termism is an implicit criticism of politicians (who are constantly being observed to "pass the hot potato" or to "kick the can down the road" or "take a punt" or "pass the buck" - all forms of short-termism). It is also a sotto voce criticism of individuals - why aren't you investing in your education, why aren't you working full-time, why aren't you committing and settling down? - again, all veiled criticisms based on an implied short-termism.

If people are not making the long term investments that we think they ought to, either we are failing to understand risks they are perceiving or they are failing to understand facts we are taking for granted.