Why short-term thinking hurts businesses

Our brains want to focus on the short term, even when a long-term perspective will help our businesses and society.

Sometimes acting ethically means working to see all the effects of our actions, rather than just the short-term outcomes.

Short-termism sacrifices future prospects to achieve more immediate but lesser results. Most people agree that short-termism in business is not good, and yet it is worryingly pervasive.

Research confirms that many executives are likely to make business decisions that may have negative longer-term effects in order to meet immediate earnings expectations or other short-term goals.

Short-termism is blamed for contributing to several corporate collapses and is often cited as a factor in the global financial crisis. It affects the sustainability of the entity and it may impede ethical behaviour, because we are more likely to behave contrary to our principles in order to achieve short-term results, fulfil expectations and get rewarded.

"We all have a limited ability to consider long-term consequences."

Rewards trump vision

If we agree that short-termism is damaging for the future of our organisations and also for the economy and society, why is it that we cannot eradicate the focus on immediate results and give due consideration to the longer-term possibilities and consequences of our actions?

Much of the explanation for our excessive focus on the short term lies with two factors: the incentives that organisations provide, and the way that our brains work.

Organisations often encourage staff to focus on the short term and reward them for doing so. Often the organisations mistake their short-term goals for the fundamental purpose that is expressed in vision and mission statements.

It is hard to focus on maximising short-term profit while at the same time adequately and accurately considering the future consequences of our decisions and actions.

Beware the short-term traps

Cognitive science also tells us that we have a limited ability to consider long-term consequences, but the following insights may help us to improve our long-term vision:

  • We are less likely to identify and respond appropriately to an ethical issue if the negative consequences of our actions are delayed. That is particularly true if our short-term actions give us immediate positive rewards. This leads us down the path of making unethical choices.
  • We tend to be irrationally optimistic that negative consequences will not occur, and this may also affect our ability to accurately consider the negative outcomes of our decisions.
  • We all suffer from overconfidence in our ethical behaviour to varying degrees. We believe we are more ethical, objective and capable than others and are unlikely to consider that we may be cognitively short-sighted. When my eyesight was affected by myopia, I could not imagine what I could not see; when I first got glasses, I literally had a revelation!

Unfortunately, correcting our long-term decision-making myopia is not that simple and requires a lot of attention and the willingness to question our assumptions about ourselves.

How can we make sure we do what is right, not what will hit the immediate expectations and targets? We need to recognise short-term goals for what they are: small steps to achieve long-term objectives. Attention is required on incentives and expectations, but we also need to keep in mind our cognitive limitations.

In the absence of decision-making eyeglasses, we simply have to look more carefully at our longer-term options and consequences.

This article is from the February issue of INTHEBLACK.

Read next:

February 2016
February 2016

Read the February issue

Each month we select the must-reads from the current issue of INTHEBLACK. Read more now.