A Genealogy of Short-Termism in Capital Markets

Abstract

The paper reviews a series of recent UK empirical studies of short-termism based on rational valuation formulae to clarify the distinction between short-termism in the form of underweighting and excessive discounting of expected returns, and short-termism in the form of investor myopia. A brief genealogy of concept of short-termism is provided which traces its development from the writings of John Stuart Mill and Adam Smith on the management of joint-stock companies, Karl Marx on the contradiction between forces and social relations of production, and Max Weber on the difference between formal and substantive modes of capitalist rationality, to the modern interpretations of Kelvin Lancaster and others based on implicit contracts and game-theory. These modern perspectives are interrogated in respect to the role played by social institutions, norms, and conventions in facilitating implicit contracts between owners and managers, managers and workers, and borrowers and lenders. Alternative approaches to short-termism are then considered, including those based on Myopic Loss Aversion or Prospect Theory, Schliefer and Vishny's Noise-Trading Model, neoclassical models of liquidity premia, and Keynesian notions of liquidity preference. Policy implications are also considered along with options for further research.