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Get Shorty

This lecture explores the concept of short-termism in finance and its impact on investment decisions. It examines the neurological basis for short-term thinking and how technology affects our brain's perception of time. The lecture also discusses Gresham's Law for the 21st century and the effects of short-termism on stock markets and industry. It concludes with a discussion on potential solutions to address short-termism and improve long-term performance metrics.

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Get Shorty

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  1. Get Shorty • Andrew G Haldane • Bank of England • The Sir Thomas Gresham Docklands Lecture • November 2011

  2. Is the World Myopic? • Twas Ever Thus • The Man with Two Brains • Gresham’s Law Revisited • Assessing the Evidence • What next?

  3. Twas Ever Thus • Jevons (1871): “The untutored savage, like a child, is wholly occupied with the pleasures and troubles of the moment; the morrow is dimly felt; the limit of his horizon is but a few days off” • Marshall (1890): “[Like] children who pick the plums out of their pudding to eat them at once” • Pigou (1920): “Our telescopic faculty is defective, and we see future pleasures on a diminished scale”

  4. The Man with Two Brains • Neuroscience provides the answer... • ...to the history of world growth since 1 million BC • Technology provides impetus to neurological rewiring... • ...reflected in tenure patterns (jobs, marriages, asset holdings)

  5. Stock Holding Periods US UK

  6. Gresham’s Law Revisited “The markets can stay irrational for longer than you or I can stay solvent”, J M Keynes • Self-destructive cycles: addiction; depression; workoholism • Self-destructive cycles in finance: Short horizon  volatility / misalignment / serial correlation  benefits short-run investor  harms long-run investor => Darwinian “survival of the shortest” • Gresham’s Law for the 21st century

  7. Dividends – Then and Now

  8. Surveys of Short-Termism • 60% of investment managers believed mandates created short-termism • 70% of investment managers rebalanced portfolios at least quarterly • Discount rates used by CEOs around 20% • 78% of CFOs would sacrifice economic value for smooth earnings

  9. Short-termism in the Stock Market E.g. r = 9%, cost = $60, x = 0.95 NPV rational = $5 NPV myopic = minus $13

  10. Short-termism in the Stock Market

  11. Sectoral short-termism Industry estimates of short-termism (1995-2004)

  12. The Effects of Short-termism Cumulative present value of future cashflows Years

  13. Short-termism and Investment OECD investment (2008) R&D intensity across countries (2007)

  14. Short-termism and Investment UK top 1000 R&D firms

  15. Short-termism and Investment Impact of Ownership • Study of 100,000 US firms (Asker et al 2011).

  16. What Next? • Long-term Performance Metrics - Rate of portfolio churn, R&D spend etc • Governance - fiduciary responsibility of Board / Executive - voting rights conditional on duration of holdings • Tax / Subsidies - duration-dependent capital gains tax • Remuneration / Dividends • longer deferral periods • “loyalty shares”

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