Is the world becoming short-sighted? As individuals, it sometimes feels that way. Information is streamed in ever greater volumes and at ever rising velocities. Timelines for decision-making appear to have been compressed. Pressures to deliver immediate results seem to have intensified. Tenure patterns for some of our most important life choices (marriage, jobs, money) are in secular decline.1 Some have called this the era of “quarterly capitalism”.
These forces may be altering not just the way we act, but also the way we think. Neurologically, our brains are adapting to increasing volumes and velocities of information by shortening attention spans. Technological innovation, such as the world wide web, may have caused a permanent neurological rewiring, as did previous technological revolutions such as the printing press and typewriter.3 Like a transistor radio, our brains may be permanently retuning to a shorter wave-length.
If these forces are real, they might be expected to be particularly important in capital markets. These are a key conduit for choice over time. An efficient capital market transfers savings today into investment tomorrow and growth the day after. In that way, it boosts welfare. Short-termism in capital markets could interrupt this transfer. If promised returns the day after tomorrow fail to induce saving today, there will be no investment tomorrow. If so, long-term growth and welfare would be the casualty.
Yet, despite its potential importance for long-term growth, studies of short-termism in capital markets are relatively thin on the ground. There is a sharp disconnect between popular perception of rising myopia, driven by technology and neurology, and empirical evidence.4 This paper aims to provide some evidence on short-termism drawing on equity market experience. It is planned as follows.
Section 2 reviews existing evidence on short-termism. Section 3 describes the theory underlying our test of short-termism and its adverse implications for investment choice. Section 4 presents the empirical results, drawing on cross-sectional and time-series data. Section 5 draws out the investment implications of the results and sets out a potential menu of policy options.
Our evidence suggests short-termism is both statistically and economically significant in capital markets. It appears also to be rising. In the UK and US, cash-flows 5 years ahead are discounted at rates more appropriate 8 or more years hence; 10 year ahead cash-flows are valued as if 16 or more years ahead; and cash-flows more than 30 years ahead are scarcely valued at all. The long is short. Investment choice, like other life choices, is being re-tuned to a shorter wave-length. Public policy intervention might be needed to correct this capital market myopia.
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