An Identity Theory of the Short- and Long-Term Investor Debate

Lines in the broader short versus long-term battle have been drawn between various camps: those favoring corporate management versus those favoring shareholder activists; those believing that corporations are best run for the exclusive benefit of shareholders versus those believing that other stakeholders' interests should also be taken into account; and those arguing that favoring the short term contemplates different actions than favoring the long term versus those arguing that the two time horizons should and do dictate the same actions: each side provides evidence for its position, but somehow, the other side is not convinced. One big reason why is that these are complex questions, scarcely amenable to resolution by definitive evidence. However, this formulation omits a huge part of the problem. It is not just that finding (enough or the right kind of) evidence is hard. It is that evidence is not sufficient to convince people (and in some cases may even not be necessary). Not that evidence is irrelevant, of course, or that it does not have considerable influence. But it does not have nearly as much influence as it is supposed to have. People's own positions necessarily go beyond what the evidence definitively shows. But staying agnostic is generally not tenable—law and policy have to be made, after all, and, from a cognitive perspective, not having working assumptions as to many matters is quite costly. What fills the gap? Identity—a sense of self, of who and what “sort” of a person we are. And an important part of our identity is the beliefs we hold. People have sufficient stake in their beliefs that abandoning them, even in the face of considerable “evidence,” is often not straightforward. This Essay shows the extent to which identity may be affecting and in some cases proving an obstacle both to constructive debate as to long-term versus short-term investor time horizons, and to arriving at a consensus on what is happening and what should happen. It also has a more radical aim: to suggest that arguments over policies would be more productive if they were more focused on persuasion and less on “proof.” This is not to say that one ought not to try to prove things. But given people's prior beliefs, their reasonable view that those prior beliefs are justified, and how difficult “real” proof is, moving the debate forward may best be accomplished by diversifying the approaches one takes