Monday, August 1, 2011

When win is lose.

We have lost our cool. And the cost is a lot more devastating than we may think.

The lack of patience or the prevalence of its evil opposite, impatience is not about those irrational moments when you lose it, kick the fridge and break your foot. It is about a way of life, or, as that old limerick would have it: “patience is a virtue; virtue is a grace and ….” You know the rest.

Not many realise that as an individual and collective virtue patience has a profound and positive impact particularly on our wellbeing including our material prosperity. Impatience has a greater devastating opposite effect. It’s a difficult pill to swallow for the quantitative economists and the growth through spending brigade, but there is an increasingly credible argument that the biggest single cause of world economic woes, and even our own problems in South Africa, can be attributed to impatience. In short, win becomes lose when “W.I.N.” is an acronym for “want it now”. The economic term frequently used is “short-termism.”

It is of course, nothing new. Patience as a principle of sound economics has been around for some 700 years if not more. Indeed, the ancient Greek translation for “economics” is simply “good housekeeping”. That certainly will raise a few giggles in the light of recent events in that country. But our much vaunted Adam Smith way back in the 18th century praised “self-command, by which we are enabled to abstain from present pleasure…to obtain a greater pleasure in some future time” as one of the most useful attributes to have.

South Africa is rife with impatience or a lack of “self-command”. We see it across all spectrums of life: individually, collectively, politically, socially and economically. Fuelled by wealth disparities, uncertainty and the virus of high expectations, W.I.N. or immediate self-gratification cuts across our spending, investments, work, social interaction, health and entertainment. The distressing symptoms are everywhere, from labour unrest to a recent reminder of our appallingly low level of savings, provision for retirement and untenable levels of personal debt.

The power of prudence and far-sightedness in economics may have been forgotten in the modern, particularly Western World as it succumbed to the temptation of consumption driven growth, speculative returns and nano-second trading. It really is a simple concept confirmed over time and in many countries: patience generates personal and household savings which in turn are used by companies to invest. Capital accumulation becomes the prime driver of future output, creating solid and sustainable growth.

World Bank director Ruth Kagia has noted that South Africa must increase investment and savings if it wants to grow the economy and create jobs. "Countries that have had growth rates of 6% or higher for a sustained period have also had investments and savings of about 25%," she said. Our current rate is about 16% of GDP. Yet, we seek answers in still higher spending and lower interest rates that will discourage saving.

But of course, we are not alone in this. Impatience or short-termism is a fundamental key to understanding the mess that the West in particular has got itself into in recent decades. This has been clearly and persuasively argued by Andrew G Haldane, an executive director at the Bank of England. What makes his paper so refreshing is the confirmation from a banking technocrat of how fundamentally behaviour can affect systems. His research covers history, psychology, neurology, financial markets and economics itself.

Among the evidence he presents is that by the time of the stock market crash in 1987, the average duration of US equity holdings had fallen to under 2 years. By the turn of the century, it had fallen below one year. By 2007, it was around 7 months. Impatience is mounting. In addition to that, performance reporting intervals have progressively shortened. Over recent decades, companies have migrated from annual general meetings, to a six monthly or quarterly reporting cycle to today’s steady stream of within-cycle trading updates.

This puts pressure on executives to virtually ignore long term sustainability and indeed become a fairly nomadic and predatory breed always seeking greener pastures and fuelling spiralling executive remuneration. Haldane points out that CEO tenure patterns have changed strikingly over recent decades. In 1995, the mean duration of departing CEOs from the world’s largest 2,500 companies was just less than a decade. By 2000, it had fallen to just over 8 years. By 2009, it had fallen to around 6 years.

Sheila Bair, the just retired chairman of American Federal Deposit Insurance Corporation is even more outspoken in her condemnation of short-termism. She wrote in the Washington Post: “The common thread running through all the causes of our economic tumult is a pervasive and persistent insistence on favouring the short term over the long term, impulse over patience. We overvalue the quick return on investment and unduly discount the long-term consequences of that decision-making.”

Can we ever turn this around? Bair is pessimistic: “Unless all of us — households, financial leaders and politicians — are willing to make some short-term sacrifices for longer-term stability, we are at risk of another financial crisis that will be just as bad, if not worse, than the last one.” Haldane, on the other hand not only offers some sound policy suggestions, but on the strength of historical evidence also hints at a natural, cyclical turnaround in which there’s a return to fundamentals and good money chases out bad.

For me, it is much simpler. Impatience is a self-perpetuating addiction. But ultimately sobriety is sought. The point comes when we hit rock bottom and realise the destructiveness of the addiction and the benefits of abstinence.

Patience is much more than a virtue. It is the most important key to individual happiness and serenity. It is a behaviour that each of us can adopt. It is one we can teach. And research has shown that it is infectious.

So be patient and spread the benevolent virus. The rewards are certainly worth it.

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