Open AccessThe effect of decision time horizon on short termism: An experimental approach
Author(s) -
Abdallah Bader Mahmoud Alzoubi,
Gavin Nicholson,
Mohammad Bader Mahmoud Alzoubi
Publication year - 2021
Publication title -
journal of governance and regulation
Language(s) - English
Resource type - Journals
eISSN - 2306-6784
pISSN - 2220-9352
DOI - 10.22495/jgrv10i4siart9
Subject(s) - economics , investment decisions , dynamic inconsistency , agency (philosophy) , investment (military) , agency cost , time horizon , rational expectations , principal–agent problem , market timing , microeconomics , moral hazard , stock (firearms) , actuarial science , behavioral economics , financial economics , corporate governance , econometrics , incentive , finance , political science , portfolio , shareholder , mechanical engineering , philosophy , epistemology , politics , law , engineering
Short-termism (i.e., the sub-optimal favouring of short-term performance over long-term performance) is generally explained as an outcome of the agency relationship whereby self-interested managers and/or stock market pressures distort the balance between short and long-term performance. We investigate if short termism (Crilly, 2017; Reilly, Souder, & Ranucci, 2016) is due to cognitive bias (temporal distortion) rather than agency costs. We test these hypotheses with an experimental approach by applying a 3x2 factorial design to manipulate temporal distortion on 60 non-conflicted decision-makers. Results suggest that individuals make inconsistent investment decisions based on differing payout time horizons. Participants faced with simple comparisons between investment opportunities were consistent across different time periods and followed a model of rational decision-making. In contrast, more complex decisions led to intertemporal inconsistency. We provide evidence that: 1) individuals on the whole struggle to deal with incorporating time into business decisions in a consistent way causing us to question the link between short-termism and agency theory; 2) principals likely view investment decisions inconsistently across time and so are a cause of sub-optimal investment decision-making and 3) we need to look beyond studies of moral hazard associated with agency theory and/or myopic market pricing when investigating short-termism.