07 October 2017

Short termism: taking advantage of complexity

There's much of interest in John Kay's presentation at the Public Hearing on Sustainable Finance at the European Commission. The key point is this:
Short termism is the product of the intervention of intermediaries. Evolution of the financial system over the last 40 years has been characterised by the steady growth of the process of intermediation, a process which has taken finance further and further away from meeting the real needs of the underlying users and suppliers of finance. Market-based capital allocation and long-term decision-making do not fit easily together. John Kay, 18 July
There's a mismatch between people's long term goals, and the short-term focus of the people who are supposed to help us achieve those goals. The same sort of mismatch occurs not only in finance but also, though perhaps less pervasively, in healthcare and education. Reasons vary, and are not easy to pin down. Information asymmetry may play a big role: in finance, as in healthcare, providers know a lot more than customers. Society is complex and large institutions are adept at misusing that complexity to take advantage of our relative ignorance. In fact, they are not above manipulating the regulatory environment to add to our confusion.

The more important question, though, is how to close the gap between what we want to see, and what our public- and private-sector institutions deliver. My suggestion is that we articulate long-term social and environmental goals, and reward people for achieving them. We don't need to prejudge intermediate steps, nor specify who shall achieve our goals. If we issue Social Policy Bonds with the aim of improving our citizens' health, say, or achieving universal literacy, then intermediaries will proliferate only if bondholders think them necessary to reach our targets with maximum efficiency. Information asymmetry means that intermediaries can take advantage of our relative ignorance about how best to achieve our personal long-term goals and substitute their own, usually much shorter-term objectives, which rarely coincide with our goals and often, indeed, conflict with them. But whereas we might not know how best to achieve our personal goals, nor society's goals, we are not at all ignorant about what those goals actually are. Social Policy Bonds would recast the way we, as a society, do things. They would put our broad, long-term, goals back where they belong: as top priorities, to which our institutions and all their activities are entirely subordinate.

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