It has become fashionable to insist on the importance of taking a long-term view but few achieve it in practice. Even in the world of pensions – vehicles that invest over decades – it is common to give too much weight to the present relative to the past.
Indeed, some behavioural finance experts argue that a ‘present bias’ is rooted in human psychology. Immediate rewards are overvalued relative to long-term goals. Whether or not this is the case, the temptations are understandable. It is easy to get trapped in the present. Examples include breaking political news, speculation about imminent interest rates changes and the latest asset allocation shifts.
“When those caught in the presentist trap do consider the past they are condemned to reading history backwards”
Not that these are irrelevant – they are the stuff of news coverage after all – but the importance of the recent is exaggerated. In some cases it may be of vital importance but such instances are rare.
The antidote to short-termism is easy to identify but hard to implement. Through the study of history it is possible to learn to assess the relative importance of the most recent developments. It provides an anchor in a sea of constantly flowing information. Unfortunately, the historical approach is too often misunderstood. It is assumed to indicate a nostalgia for the past. Others see it as associated with a conservative world view.
Both charges are misplaced. A key reason to study historical trends is to counter what could be called ‘presentism’ – that is the failure to intellectually transcend the present.
When those caught in the presentist trap do consider the past they are condemned to reading history backwards. They simply assume that historical events must be a version of the present. They cannot grasp either what is specific about today or what is particular to earlier periods.
The attempt to understand geopolitical shifts using economic models is a particular example of this failure. As I argued back in December, such models are incapable of grasping the subject matter of politics: the study of discontinuities in human affairs.
These criticisms may sound academic but they have enormous practical consequences. It is not hard to find numerous examples of such errors in the world in general and the investment arena in particular. Indeed, the vast bulk of the discussion of social matters is coloured, to a greater or lesser degree, by presentism.
Under such circumstances, any attempts to view the world from a longer-term perspective should be welcomed. The recent study on the long-term development of emerging market equities as an asset class is just one example (see here).
Historical thinking is the only counter to the scourge of presentism.
Daniel Ben-Ami, Deputy Editor