Short-termism -Mental Model 099

The Attitude That Led To The 2008 GFC

An excessive focus on short-term results at the expense of long term interests.

 

Example: Short-termism was a key cause of the 2008 Global Financial Crisis. Large financial institutions wanted to sell as many home loans as possible, which was possible as banks were able to graning ‘NINJA’ loans— mortgages for people with No Income, No Nob, No Assets.

 

In the short term, the increasing number of people buying houses meant that housing prices skyrocketed. This made the financial institutions balance sheet look very healthy. But the growth was built on a house of cards.

 

The housing market crash. Homeowners handed back their keys and financial institutions became the ‘proud’ new owners of thousands of homes they didn’t want and couldn’t sell. Their stocks plummeted.

 

Wisdom: “Everyone who has worked with American management can testify that the need to satisfy the pension fund manager’s quest for higher earnings next quarter, together with the panicky fear of the raider, constantly pushes top management toward decisions they know to be costly, if not suicidal, mistakes.” — Peter Drucker

 

Read more.