Short-termism: How To Fail Long-term

Short-termism is pretty self-explanatory: giving priority to immediate profit or reward over long-term results. In business, it undermines all actions which take time to mature. That is, quickly executed projects with short-term benefits are taken over harder, lasting initiatives which do not produce tangible effects in a given term. Some companies refer to it as quarterly capitalism, where meeting quarterly earnings goals comes at the expense of long-term investment. When we approach business this way, we neglect investing in the future and lose out long-term.

An instance of short-termism is a farmer who sells some of his farmland. He enjoys the immediate benefits of less overhead and more money. There is less land to cultivate and he is swimming in cash. But if the farmer waited to sell the land when it produced corn, he would have experienced a much greater benefit. The cost is tending to the land and waiting for that moment. Although it seems like a tiny example, the same exact thing is a trigger for short-termism in investing and business: reduced transaction and production costs and larger profit margins.

It forms a vicious cycle. Shareholders and investors fall prey to short-termism when they view their profits in the given term. Companies that provide quarterly earnings guidance are trying to appease them with constant growth. Thus the investors and the leadership of the company are both blinded by unsustainable results. The firm spends less on research and development. It typically has no long-term strategy. Employees are not positioned to succeed via training and workshops since long-term growth isn’t the aim. Thus in the long run, short-termism hurts everybody at stake: the company, the leadership, the employees, and the investors.

In fact, short-termism even hurts the broader economy. It creates fewer jobs: companies focused on the short-term aren’t hiring new employees or investing in the ones it has. Economic growth is at stale: short-termism is all about fast financial returns, meaning such companies grow slower than long-termism counterparts. The booming business is unsustainable: short-termist organizations are not prepared to adapt to changes in the economy. The incentive is quarterly earnings: because there is huge pressure on short-term goals, managers face undue stress and employees leave companies. In the end, short-termism means you thrive for a little bit and then wither and die. Long-termism dictates that you stay in the game and dominate.

Real-life examples of short-termism:

• Corporate Strategy: a company prioritizes reducing expenses to improve quarterly earnings, even if these cuts result in underinvestment in innovation and employee training. Shareholders see a boost in profits. But the company loses its competitive edge. In a short while, it goes bust.

• Financial Markets: investment firms might favor short-term trading strategies to demonstrate immediate gains. In lieu of investing in sustainable, long-term opportunities. This puts them at risk of market volatility.

• Public Policy: governments may implement popular short-term measures (e.g. tax cuts, stimulus spending) to win elections without addressing structural issues (e.g. inequality, poor infrastructure, outdated legislations). Although these policies boost immediate approval ratings and win elections, they result in long-term social instability.

• Personal Choices: an individual might decide on a job that offers a high salary immediately. In spite of the fact that there is little opportunity for career development or long-term satisfaction. Over time, this short-termism results in stagnation, fatigue, or a lack of fulfillment. Some people live their entire lives like this.

How you can use short-termism as a mental model: (1) what about tomorrow — when making decisions, consider future (1 year, 5 year, 10 year) impacts; (2) balance out indicators — rely both on short-term (e.g. customer acquisition cost) and long-term (e.g. customer lifetime value, retention, employee engagement) performance metrics; (3) devise yardsticks — define your long-term objective and short-term milestones to ensure your immediate actions align with future consequences; (4) consistency over intensity — design systems that make you win the long game (e.g. give employees bonuses for short-term performance and raises for long-term aptitude); (5) be quick on your feet — when you notice yourself making a decision primarily for short-term benefit, stop and recalibrate your process so you do not do the same next time.