People Are Bad at Long-Term Thinking

People are generally bad at thinking and making decisions about long-term consequences. Gate’s Law observes that people overestimate the short term and underestimate the long term. People are motivated by loss aversion which leads to status quo preserving behavior and biases people towards keeping things the same.

Individually, people find evidence for whichever mindset they have, reinforcing beliefs and making them more rigid. This makes it difficult to change the default behavior of thinking short-term. As groups, these effects are amplified—it’s even harder to think long-term when many people need to change their minds, especially if it involves the out-group (in-group favoritism).

Because long-term thinking is generally done poorly, people and businesses that operate on longer time horizons have a competitive advantage.

  • Doughnut Economic Model

    A visualization of sustainability represented by concentric rings (hence the doughnut). At the center are twelve factors necessary to support life that array outward. The first ring closest to the center is the minimum required for society to function, but as it extends outward it reaches the ‘ecological ceiling’ such as climate change, pollution, etc.

  • Governments Are Comfortable Thinking Long Term When it Comes to Infrastructure

    While government tends to be short-term oriented (the election cycle drives decisions so officials can be re-elected), an area the do feel comfortable thinking long term is infrastructure. With regularity, they will initiate projects to build roads, telecommunications, buildings, and other infrastructure that takes many years to build (the second avenue subway line in Manhattan started in 1972).

  • Psychology Overwhelms Fundamentals in the Short Run

    In discussing market changes, Howard Marks, remarks that psychology overwhelms fundamentals in the short run as the reason why markets can appear irrational. This is a neat way of holding both the idea that investors are rational and markets are irrational simultaneously.