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Financial Accounting Theory (ACCT1077)
Royal Melbourne Institute of Technology
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Kym Irving Overcoming Mental Time Travel, Delayed Gratification and How Not to Discount the Future S can be viewed as the concentration on obtaining immediate profits or benefits at the expense of, often superior, future benefits. is seen as a characteristic not only of individuals (for example, investors and fund managers) but of companies (Laverty 2004), stock markets (Black and Fraser governance structures (Le BretonMiller and Miller 2006) and policies (Business Council Australia 2004). It has been linked to inadequate saving for retirement, reduced investment returns, greater market instability and destruction of value (Atherton, Lewis and Plant 2007a). As a construct, shorttermism is complex and multidimensional. Accordingly, this paper draws upon theory and research from a range of fields to uncover both explanations of the phenomenon and implications for countering an overly focus. The advantage of a multidisciplinary view is that the phenomenon of can be examined from a range of perspectives with each perspective bringing to bear a different focus and set of interpretations in relation to the underlying causes and consequences of tendencies towards the Across these perspectives, analyses of the drivers of give rise to sets of counter strategies that, when aggregated, provide a richer and more comprehensive approach to its management. The paper provides a broad survey of theory and research related to The earlier sections of the paper cover the foundational elements, beginning with biological and developmental explanations of human tendencies towards not only the but its converse, the It then examines in relation to the economic and psychological constructs of choice and delay discounting. A number of psychological and cognitive processes are discussed that challenge some of the conventional wisdoms about why individuals discount the future. Given the current controversial status of neuroeconomics, recent findings on the brainbased structures and processes that might underlie are also presented. Later sections discuss contemporary ideas and research from psychology and judgment and decision making on the processes that 278 Australian Accounting Review No. 51 Vol. 19 Issue 4 2009 has been identified as a characteristic of individuals, companies, stock markets, governance structures and policies, and has been linked to inadequate saving for retirement, reduced investment returns, greater market instability and destruction of value. As a construct, is complex and multidimensional. Accordingly, this paper draws upon current theory and research from a range of fields including behavioural economics, psychology and the cognitive sciences to uncover both explanations of the phenomenon and implications for countering an overly focus. Possible strategies for achieving the latter are discussed. Correspondence Kym Irving, School of Accountancy, Faculty of Business, Queensland University of Technology, GPO Box 2434, Brisbane Queensland 4001 Australia. Tel: 7 3138 fax: 7 3138 email: doi: Overcoming might be harnessed to foster longer term visions, such as mental time travel and emotional engagement with the future. Clearly, though, individuals do not make decisions in isolation. between the short and long term are made within social and organisational settings that may or may not encourage a orientation through such mechanisms as management practices and cultures, and governance structures. Several research examples addressing these mechanisms are presented. Finally, implications and future research directions are discussed. Biological Foundations: The Evolution of Patience The tendency of humans and other animals towards in general, not just financially, can be viewed from an evolutionary and biological perspective. As a survival strategy, immediate consumption of available resources is better than delaying consumption when you know what the future may hold (Stevens and Stephens 2008). Future uncertainty operates to magnify present opportunities, even though benefits may be maximised in the longer term. In studies of pigeons, rats, chimpanzees and humans, the tendency to choose an immediate reward over a delayed, but greater, reward is well documented, but so is the ability to forgo immediate gains to maximise future ones (Beran and Evans 2006). Even rats show evidence of delaying gratification, albeit for very short periods of time (seconds) (Reynolds, de Wit and Richards 2002). While humans were once assumed to be the only animal to show high levels of patience, there is growing evidence that other primates also show this characteristic and that humans may indeed be less patient (or more impulsive) than chimpanzees when waiting for food rewards (Rosati, Stevens, Hare and Hauser 2007). On the other hand, humans are more prepared to wait for monetary rewards than for food rewards (Rosati et al. 2007), suggesting that the mechanisms that underlie varying levels of patience might differ according to whether rewards are biological or abstract. Recent theorising also suggests that whether or not animals choose immediate rewards over longer term, larger rewards may be related in an evolutionary sense to the natural ecology of their food foraging contexts. For example, living in habitats that provide small and unpredictable sources of food, chimpanzees came to exert more effort (such as through tool usage) and travel longer distances to procure food than bonobos did (Rosati et al. 2007), resulting in a greater acceptance of delayed food rewards (Long and Platt Stevens and Stephens 2008). Hence, contextual factors play an important role in the evolution of patience. Of what relevance are evolutionary and biological theories to discussions of Much C 2009 CPA Australia K. Irving mentary can be found in the popular press about the tendency of humans to irrationality, that their financial and other decisions are driven emotions, and that they are swayed immediate gratification. Yet recent research in evolutionary and comparative biology suggests that core components of the capacity for decisions evolved before the human lineage diverged from (Rosati et al. 2007, p. 1663) and that not just humans are capable of planning for future events (Correia, Dickinson and Clayton Ra, Alexis, Dickinson and Clayton Zentall 2006). Humans may display orientations to the short term, but equally they can be nudged towards the long term depending on the conditions that prevail. In the following sections, consideration is given to what these conditions might entail. Developmental Foundations: Delaying Gratification While humans share capacities for patience with other animals, what is strikingly different about humans is the individual variation that occurs in how humans approach the task of forgoing immediate gratification in order to gain benefits in the future. Research into how children learn to forgo immediate gratification has implications for how adults do the same in a number of arenas. The classic, and often cited, studies of immediate and delayed gratification Mischel in the 1970s illustrate the combined roles of learning and maturation in developing delayed gratification and its consequences for later development and achievement. Mischel conceptualised delay of gratification as a competence necessary for the development of selfcontrol and willpower. His early observations of children in Trinidad led him to devise a series of experiments where young children (around age 4) were confronted with the choice of eating a small treat immediately or waiting for a larger treat, usually gained after 15 minutes. These treats were in plain view of the child and the experiments were varied in terms of what constituted the treat (food, toys and so on), and whether the experimenter remained in the room with the child or not. At any time during the session the child could ring a bell to sound that they had chosen the smaller treat and no longer wanted to wait. Hence, there were children who took the treat immediately, those who waited varying periods of time before succumbing, and those who held out for the full time period and were rewarded with the larger treat. The children who delayed the longest were found to have higher levels of achievement in adolescence (higher US college admission scores and higher socialcognitive competence) and, as adults, reported they planned carefully for goals (Mischel, Ayduk and 2003). Australian Accounting Review 279 Overcoming positive, causing future consumption to be devalued when compared to the present (for example, Time 1 Time 2 However, there is diminishing marginal utility from consumption in that the second unit of consumption has less utility than the first and so on. Therefore, decisions are made that maximise the sum of utilities derived from consumption across all future time periods. Other assumptions include the constancy of the utility function, in that preferences are assumed not to change, and independence of consumption: preferences are not affected outcomes in any periods (Streich and Levy 2006). Neoclassical economic theory assumes that rational can calculate which alternative will yield the greatest utility, and they do this on the basis of their knowledge of utilities, alternatives and outcomes. The DU approach provides a method for modelling decisions allowing the many factors that can affect the between current and future satisfaction to be summarised the discount rate (in behavioural economics and psychology) or discount factor (in economics). Assumptions underlying the exponential DU model, particularly relating to constancy of the discount rate and continuity of preference, have been found to be problematic and not supported evidence, leading to refinements of the standard model. For example, individuals tend to discount losses more heavily than gains, discount big stakes more than small ones, and vary their discounts systematically as the time varies until the outcomes (Streich and Levy 2006). These findings challenge the use of a single discount rate for all types of decisions. Hyperbolic and discounting models are now seen as more accurately depicting the phenomena of delay discounting (Frederick, Loewensein and Holt, Green, Myerson and Estle 2008). In contrast to the assumptions of the standard model, humans and other animals (Stuphorn 2005) have been found to use a higher discount rate for events closer in time than for those further away and to reverse their preferences. An example taken from Lohrenz and Montague (2008, p. 483) illustrates how individuals lack constancy in their preferences and may in fact reverse their preference: A majority of people would probably prefer today to in a week. But few people would probably prefer in a year to in a year and a week. While discount models describe what individuals do when making choices, theoretical explanations of why and how the decisions are made are more limited. Prospect theory (Kahneman and Tversky Tversky and Kahneman 1992), for example, derives from expected utility theory of choice under uncertainty (Von Neumann and Morgenstern 1947) and explains how individuals evaluate probabilistic rewards (usually C 2009 CPA Australia K. Irving based on lotteries or gambles) rather than rewards. Probabilistic reward choices involve choices between a smaller, less risky reward and a larger, more risky reward. As with delayed rewards, preferences may reverse, but this is associated with risk declines. Green and Myerson (2004) argue that while prospect theory explains many of the central findings of choice under uncertainty, it cannot be generalised to choice. The underlying processes appear to be different. For example, inflation affects how steeply delayed rewards are discounted, but has no effect on probabilistic discounting, while the amount or size of the reward has opposite effects on each type of discounting (Ostaszewski, Green and Myerson 1998). Smaller, delayed rewards are discounted more steeply than larger, delayed rewards, while smaller, probabilistic rewards are less steeply discounted than larger, probabilistic rewards. Both probabilistic and delay discounting do appear to be described hyperbola or functions, though (Green and Myerson 2004). Research on group differences also supports different underlying mechanisms for each type of discounting. For example, high and low sensation seekers differ in their discounting of probabilistic rewards, but not in their discounting of temporal high sensation seekers are less risk averse and discount less steeply. On the other hand, highly impulsive individuals discount delay rewards more steeply than less impulsive individuals, but there are no differences between them for discounting of probabilistic rewards (Green and Myerson Holt, Green and Myerson Ostaszewski Ostaszewski 1997). and choices appear to enlist different processes. Unlike choice experiments, realworld is likely to entail consideration of a range of dimensions including both risk and time. In one of the few studies to examine the interaction of risk and effects, Anderson and Stafford (2009) found that just the presence of risk in an intertemporal choice situation leads to individuals being less patient in general, irrespective of when the risk occurs. Contrary to previous suggestions that delayed rewards might be associated with more risk (for example, the risk that they will not eventuate), they found no evidence that the influence of risk varies according to the duration of the delay. These studies show that psychological mechanisms other than rational (in an economic sense) decisionmaking play an important role in delay discounting (Long and Platt 2005). Behavioural economics draws attention to these mechanisms as foundational elements of explanations of a range of economic behaviours (such as saving). For example, the term is used to designate models of rational choice that take into account the limitations of knowledge and cognitive Australian Accounting Review 281 K. Irving Overcoming capacity (Thaler 1994). These limitations mean that individuals make use of mental shortcuts and rules of thumb, for example, which lead to errors or biases in decisions. The following section discusses how other cognitive processes underpin decisions about the short and long term. Psychological Foundations: Cognitive Processes Why do individuals reverse their preferences over time? Why do they plan to save for their retirement but then reverse their decision and spend on immediate consumption? Understanding what happens in the gap between deciding what to do (choosing to delay a reward) and taking action (choosing an immediate reward instead) has been of less interest to economists and more to psychologists (as with delay of gratification). work reveals the strategies that children employ as they develop delayed gratification. It would be reasonable to assume that adulthood individuals should have welldeveloped strategies in place. Clearly, these strategies are not always employed. A range of psychological processes assist in understanding how judgments and choices are made and why changes (for example, preference reversal) arise. In choice research, psychologists have investigated processes including attention, information integration, learning, deliberative processes, automatic processes, affective processes and memory. As Weber and Johnson (2009, p. 55) point out, the power from understanding such processes lies not only in accounting for choice inconsistencies but also in the provision of and recipes for decision aiding and interventions, including the design of decision environments that nudge people to construct their preferences in ways they will not forget after the for example, in ways that favour the long term over the short term. As mentioned, psychology draws attention to the cognitive processes that underpin regarding time preferences. Query theory is a recent process approach emphasising the role of memory encoding and memory retrieval when making decisions (Weber, Johnson, Milch, Chang, Brodscholl and Goldstein Weber and Johnson 2009) and has been used to explain the phenomenon of asymmetric discounting. This phenomenon is revealed in the degree of discounting made in choices involving delay and acceleration of rewards. Research has found that future rewards are discounted less when they are brought forward from the future than when they are delayed into the future. For example, Weber et (2007) respondents were given choices of a gift voucher in three months or an immediate gift certificate of lesser value (acceleration condition). In the delay 282 Australian Accounting Review condition, choices were of a immediate gift certificate or one three months later of larger value. So in the delay condition an individual might discount the future making choices that show that they equate a voucher now with a voucher later. In the accelerated condition, choices might reveal that a voucher in the future is equated with a one now. Hence, the accelerated condition reveals a lower discount rate. The concept of loss aversion (Tversky and Kahneman 1992) has been used to explain asymmetric discounting. Delay of consumption is perceived as a loss (disutility) while acceleration is seen as a gain (utility), hence discounting of losses has a steeper slope than for gains. While gains and losses are thought to trigger different affect states, the role of these underlying processes has not been addressed in theories such as prospect theory. As mentioned, research suggests that other processes and perceptions may play a role aside from loss aversion. According to Weber and Johnson (2009, p. 55), in economics, preferences are from choices and assumed to reflect while in psychology, preferences are to be constructed in order to make a Hence, the construction of a preference entails psychological processes including memory and attention. What is noteworthy about their research is that Weber and her colleagues were able to eliminate the asymmetry altering the order of reasons given for decisions. Query theory presupposes that decisionmakers query their memory for information relevant to the decision. In deciding whether to delay consumption, tacit queries such as should I consume should I wait to get more are executed serially. Memory research shows that, because of output interference, retrieval is less successful for later queries than earlier ones, so early queries have a greater influence on Weber et al. (2007) demonstrate that the dominance of thoughts should I consume over thoughts predicted discounting. In the acceleration condition the query order was reversed with thoughts should I wait to get more preceding thoughts. Their results suggest that reasons supporting immediate consumption, if queried first, inhibit reasons supporting delayed consumption and that memory interference may help to explain the phenomenon. Their results also show the effect of measurement (through task demands) on results obtained in tests of delay discounting. How you ask the question may influence the generation of reasons that in turn influence decisions about the short and long term. Weber and her colleagues (2007) argue that identifying the processes that underpin less impulsive discounting in acceleration decisions may lead to methods to lessen excessive discounting of future outcomes in everyday decisions, such as saving adequately for retirement. Providing individuals with specific protocols designed C 2009 CPA Australia K. Irving Overcoming greater activation in brain areas related to deliberative processing. More recently, Shamosh and colleagues (Shamosh, DeYoung, Green, Reis, Johnson, Conway, Engle, Braver and Gray 2008) have proposed that activity in an area called the left anterior prefrontal cortex (aPFC) may be associated with reduced delay discounting (and resistance to smaller, sooner rewards). These researchers suggest that this area of the brain may be responsible for integrating signals from the two neural systems (limbic and prefrontal) in order to promote a higher order or more abstract goal, such as saving for the future. Their finding is consistent with the view that during delay discounting, individuals make calculations on the basis of abstract goals and (for example, future selves, reward events or delay periods). Individual differences in the ability to successfully integrate these abstract goals and component arguments may underpin variations in delay discounting. As mentioned earlier, gratification of abstract rewards tends to be easier to delay than gratification of biological rewards. One explanation is that biological rewards (for example, food) are associated with action sequences that are biologically driven, whereas abstract rewards engage more deliberative thinking and processes. Where does money stand in terms of reward type? Is money an abstract reward or a drug as is often suggested? Research comparing food, alcohol and money shows that food and alcohol are discounted to a similar degree, but more steeply than money (Odum and Rainaud 2003). Recent fMRI research suggests that monetary rewards share some of the same neural basis (the striatum) as social approval (Izuma, Saito and Sadato 2008) and other social rewards such as positive social feedback and relative social status (medial prefrontal cortex, Saxe and Haushofer 2008). While money is generally not considered a biological or primary reward because of its late appearance on the evolutionary scale (see Lea and Webley 2006 for the debate), the same dopaminergic pathways that are triggered drugs and other rewards are also triggered the anticipation and realisation of earning money (Knutson, Fong, Adams, Varner and Hommer 2001). In summary, critics of a or dualsystem approach caution that there are inconsistent findings in human studies with some not showing evidence of activation of the impulsive system for immediate rewards, but confirming links between thinking and the deliberative processing regions (Scherbaum, Dshemuchadse and Kalis 2008). According to Sanfey et al. (2006, p. 114), the findings from neuroscience illustrate that at the individual level involves the among multiple subsystems governed different parameters and possibly even different Currently, the jury is still out and much debate surrounds the meaning 284 Australian Accounting Review and interpretation of fMRI data, the existence of clearly delineated neural systems underlying choices, and the relevance of neuroscience to economic theory (see Camerer 2008). Alternate approaches to understanding the mechanisms underlying and decisions have been identified and these are discussed in the next section. Looking Forward: Mental Time Travel, Emotional Engagement and A commonly held view is that emotions are linked to System 1 thinking rather than System 2 thinking and that cognition is the antithesis of rational thinking (Evans 2008). A more accurate depiction is that emotions are central to all and thinking. There is widespread agreement that the neural systems underlying emotion and cognition are integrated and interact at a high level. As previously mentioned, there is recent fMRI evidence for the integration of these brain areas in decisionmaking (Shamosh et al. 2008). Izard (2009, p. 4) argues there are no pure cognitive and emotion states and that, for example, the emotion of interest or curiosity the central motivation for engagement in creative and constructive endeavors and for the sense of Interest and its interaction with other emotions account for selective attention, which in turn influences all other mental Similarly, Boyer (2008) argues for a model that goes against approaches which view as adaptive and as irrational. Boyer proposes that mental time travel (Suddendorf and Corballis 1997) provides a level of emotional engagement that may counteract a natural propensity towards time discounting and opportunistic choices. Mental time travel is the conscious reliving of past events or preliving of future ones, and entails complex constructive processes incorporating visual, sensory and emotional information (Berntsen and Jacobsen 2008). It is distinguished from daydreaming, which is not always under effortful control and may be fanciful and unrelated to the self. In this model, emotion in interaction with (rather than in opposition to) provides a catalyst for countering immediate gratification. Mental time travel achieves this triggering experiences of emotional rewards associated with the hypothetical future event. For example, constructing a detailed vision of life in 10 years after adopting a savings and investment regime might entail imagining achievement of a certain lifestyle goal (for example, house the ocean) along with the associated sensory information (for example, the sights, sounds and smells C 2009 CPA Australia Overcoming of the sea) and the emotional rewards (for example, pleasure, satisfaction, fulfilment and social status) of achieving that future lifestyle. Travelling into the future through conscious construction of future events enables the associated emotional rewards to be experienced in the present, there countering reward systems associated with immediate gratification and avoiding the discounting of future outcomes. Seeing oneself in the future engaging in a planned activity with the associated emotional state is highly motivating. For Boyer (2008), the motivational power of emotional engagement with future events enables myopic behaviour to be opposed because there is a system in play. The emotions associated with the episodes constitute very strong that help to nudge individuals towards more considered options. The concept of multiple selves has been used to understand differences between planned behaviour (long term) and actual behaviour (short term). For example, the self provides the plan for future behaviour, but the self undoes these good intentions. Other authors suggest that it is more complex than this and have drawn attention to the role of time perception and future orientation in choices and Husman and Shell (2008, p. 168) assess future time perceptions through four dimensions: valence: the importance placed on goals attainable in the future (related to delay discounting) extension: far ahead one projects connectedness: ability to make connections between present activities and future speed: speed at which individuals feel time is Their research indicates that there are individual differences in future time perception. Individuals with a strong future time perception value goals, are less affected lack of proximity (delay discount less), are more likely to make connections between present actions and future goals, have a more extended time horizon that allows goals to be seen as nearer and more important, and anticipate and plan for the future (rather than being overwhelmed looming deadlines or feeling the future is rushing towards them). Hence, future time perception and orientation appear central to establishing strategies to overcome There is some recent evidence Garton, Ballard, and Knutson 2009) that the degree of similarity between an perceived present self and their future self is associated with less delay discounting and a higher level of financial C 2009 CPA Australia K. Irving assets held the individual. These results lend support to a hypothesis that states that experiencing little or no continuity with a future self means that individuals are less likely to save for that future self, rather than to the notion of multiple discrete selves. At this time, the mechanisms underlying individual differences in future time perspective (which some see as a personality trait) are not well articulated, but may be linked to processes and the perception of how slow or fast time passes. For example, Wittman and Paulus (2007) propose that time perception is central to delay (or discounting. They suggest that impulsive individuals perceive time duration more slowly than less impulsive individuals, such that more immediate choices are favoured over longer term ones because the delay time is perceived as too long and, therefore, costly. The implication is that time is subjective rather than objective as conceptualised in economic models of choice. Culture may also play a role in that a sense of the past and future may be built not only on cognitive processes but also on cultural systems involved in the structuring of time (Friedman 2005). For example, time is viewed as linear and divisible and having a cost in some cultures and as a circular flow between past, present and future in others (Leonard 2008). Little research exists exploring the links between culture, time perception, and choice. Earlier it was noted that the underlying foundations of the ability to make decisions are part of early human evolution. Humans developed the capacity for because delaying gratification had enormous adaptive benefits in terms of enhanced survival and reproduction. For and Rabin (2003) delayed gratification is a process that entails not only forming a cognitive representation of the future goal (through imagining or visualising), but also believing that the distant goal can be attained through behaviours that can be planned and carried out. Clearly, then, saving for the future may be strengthened mental time travel, which allows the saver to visualise and take pleasure in the benefits gained in the future (cf. the pleasure of immediate However, if the savings goal is perceived as unreachable or the saver does not believe they can undertake the necessary steps to achieve the goal, then the salience of immediate expenditure is more likely to win out. Outcome expectations (for example, the likelihood of owning a house the ocean) are also important in making initial choices between immediate and delayed rewards (Mischel et al. 2003). Additionally, choices are altered events or factors that weaken Research across a number of domains reveals that making decisions and choices is psychologically draining (Baumeister, Sparks, Stillman and Vohs Australian Accounting Review 285 Overcoming roles were designed to take a focus, often reported feeling pressure to respond with individual achievements. When managers felt pressure to report on progress towards strategic objectives, but at the same time were judged on quarterly or performances, the salience of temporal traps was heightened. Moreover, when managers are unsure of their roles (role ambiguity) because there is a difference between the information they need to fulfil their roles and the information available, is affected. In Marginson and (2008) study of a large telecommunications company (12 employees, billion turnover), role ambiguity was significantly correlated with shorttermism and accounted for of the variance in decisions (directly measured through interview questions regarding longrun financial effectiveness vs good budget performance). In combination, these findings suggest that confusion surrounding managerial roles can bias to the short term. It has been argued that one of the drivers of at a corporate level is an emphasis on earnings. For example, the view that meeting earnings expectations helps maintain or increase the share price, offers assurance to customers and suppliers, and advances the reputational status of management, is reported as widespread amongst US financial executives. On the other hand, not meeting earnings targets is seen as and a possible cause for dismissal (Graham, Harvey and Rajgopal Rappaport 2005). An emphasis on earnings per se need not lead to shorttermism, rather how earnings information is used within the culture of an organisation may provide the nudge or not. For example, when used in a developmental rather than evaluative manner, earnings information can provide productive feedback on progress without forcing undue attention to particular metrics (Laverty 2004). While incentives and stock market pressure were predictive of undervaluing the long term in research, in a model testing a range of individual, organisational and external conditions (for example, competitive pressure and security perceptions), the organisational features (temporal traps, density, and trust and memory) were the most salient predictors, emphasising again the role of internal practices and cultures. Other examples of the impact of entrenched cultures and values on and orientations come from surveys of managers in the financial and corporate sectors. In the UK, for example, fund managers have been found to describe their task as trading rather than investing, and to argue that because the rest of the market holds a view, they are required to adopt a similar stance (Guyatt 2005, 2008). In research, few managers risked adopting a longer term C 2009 CPA Australia K. Irving horizon for fear of penalties such as it earning lower bonuses and Yet research from other countries indicates that the pull to shorttermism is not always felt as acutely as in the UK and US. Segolod reports much less pressure for behaviour among Swedish companies compared to US companies, suggesting that factors which drive a shortterm orientation may differ depending on the contexts in which companies operate. The willingness of Swedish companies to make investments was related to expected market growth and political stability rather than share market pressure, capital costs or inflation rates as reported US companies. research suggests that the goals of business leaders from different countries may reflect differences in underlying cultural values. (2007) research across 15 countries in the mid to late 1990s indicated that a Long Term Orientation Value (the valuing of persistence and thrift) was highest among Asian countries and lowest among Western and African countries, with countries that valued thrift having higher savings rates than countries scoring lower (although the possible effects of other variables such as high growth considered). Using MBA students who worked during the day and studied at night to offer their perceptions of the typical business leaders in their countries, Hofstede and his colleagues (Hofstede, Van Deusen, Mueller and Charles 2002) explored the links between values orientation and business goals. Business leaders in longer term oriented cultures were seen as pursuing longer term profit goals (10 years). Interestingly, the top five goals perceived to be of most importance in the US (in were of the and within the In Denmark they were something 10 years from face, within the and towards while in India they were of the national and No distinction was made between business types within countries, so there is no evidence of whether values also showed variation according to company ownership or governance type (see below). Clearly, the context of in which there is an emphasis on rewards and incentives for and penalties for longer term outlooks is considered instrumental in driving a however, cultural variations suggest that such emphases are not universal and that value systems and business orientations play key roles. Characteristics shown to be important at the individual level in overcoming a orientation, such as possessing a future time orientation and engaging with the future in meaningful ways, are also important at an organisational level. Organisations that provide confusing Australian Accounting Review 287 K. Irving Overcoming environments for individuals (for example, where there are excessive temporal traps or role ambiguities) are likely to encourage individuals to orient towards the because the future is too uncertain. that pit individual achievements against longer term organisational benefits are also problematic. Ownership and governance structures Recently, attention has focused on the ways in which company ownership type (for example, Liljeblom and Vaihekoski 2009) and governance structures have an effect on the development of internal routines, processes and systems that are associated with shorttermism. In comparing managerial, alliance and family governance structures, Carney (2005) argues that attributes for and are often entrenched in systems of corporate governance. There is growing evidence that elements of the governance and leadership structures of businesses (FCBs) provide a number of drivers of orientations, while many of the structures of managerial governance focus on the earnings are given salience, incentive and reward schemes are attached to the short term, and executive tenures are reducing from an average of eight to four years in two decades (Le and Miller Miller, Le and Scholnik 2008). Table 1 provides a comparison of the of governance with the managerial style. While perhaps somewhat idealised in the description provided in the table businesses can also have difficulties), a number of characteristics of FCBs map on to approaches that have been found to successfully encourage a perspective at the individual level future time perspective (for example, time horizon), emotional engagement (for example, reputation of business, relationships with employees and external stakeholders), and mental time travel (for example, vision for the future). Such companies have missions and visions that often extend beyond the current generation while long CEO tenures encourage a farsighted, outlook on the business (Le and Miller 2006). Frederick (2006) argues that intergenerational time preferences mean that while individuals may discount their own futures they may be less likely to discount the futures of distant generations, preferring policies and strategies that minimise negative consequences. Implications and Future Research While our knowledge about how individuals make decisions has grown rapidly, research on the architecture 288 Australian Accounting Review of decision environments that enable individuals to take a longer term view is relatively recent and in its infancy. Much of the discussion to date about the best strategies to adopt has been at a theoretical level rather than an applied level, but there are a number of examples that can be drawn upon. Some strategies appear intuitive. As humans, we understand the parameters of temptation and much has been written about succumbing to the present, not just within academic domains but more these themes appear within mythology, philosophy and religion. Other strategies are not so intuitive and arise from our increased understanding of the various processes underlying human Additionally, there are many gaps in our understanding of the processes underlying requiring research attention. Theory development in delay discounting Research on discounting involving choices suggests that different underlying mechanisms are at play to those underpinning the probabilistic choices emphasised prospect theory (Green and Myerson 2004). This is further supported the finding that a number of psychological characteristics (impulsivity, sensation seeking) appear implicated in the extent to which individuals discount probabilistic versus delayed rewards. Taken together, these findings suggest scope for further theory development in relation to intertemporal choices and delay discounting, and that this may require an approach. At the realworld level, decisions involve many factors, yet research is yet to examine in any detail the interaction of these variables in about the short and long term. Encouraging deliberative thinking, and There are a range of conscious strategies that individuals knowingly employ to counter System 1 pulls in order to behaviour and to longer term outcomes. For example, adults, as well as young children, use distraction techniques, contingency thinking, goal setting and bargains. For these to be successful, however, individuals need to be cognisant that their preferences may alter and pull them in the direction of impulsive choices. Research Sourdin (2008) indicates that households who are aware of their selfcontrol problems actively choose to hold illiquid assets (property, superannuation). She suggests that there may well be a need for savings instruments that target the varying commitment requirements of households. It is clear that the context in which decisions are made can have a profound effect on choices. In organisational C 2009 CPA Australia K. Irving Overcoming individuals towards more beneficial outcomes without impinging on their freedom to choose. Other examples include allowing federal taxpayers to automatically contribute tax refunds to their superannuation funds and including a bonus equal to their marginal tax rate (Thaler a strategy which benefits from perceptions that contributing a refund is an easy form of saving that avoids the of contributing from already saved funds (c. government that are dependent on individuals contributing from savings). In Australia, arguments have been put forward for government intervention in setting minimum standards for superannuation default options in order to improve retirement benefits, rather than placing the onus on members to make investment decisions for which they may lack the necessary knowledge skills willpower (Gallery and Gallery 2005). It has also been argued that the use of defaults in these ways is more effective and less costly than expensive government interventions such as tax incentives or public education (Weber and Johnson 2009). Weber et (2007) research using Query Theory also suggests that the way decisions are posed, prompting individuals to think of the advantages of a focus and to focus on thoughts, has important implications for overcoming a focus and may help in the design of choice options. These ideas are yet to be explored outside experimental settings, but research could investigate the use of varying protocols in the presentation of superannuation investment options and retirement savings plans, for example. Accountants who offer financial planning services might also consider the ways in which they communicate plans and strategies to their clients, and explore approaches that are effective in nudging clients along paths that assist them to achieve their financial goals. Future orientation and time perception It has been proposed that cognitive and emotional engagement with the future provides a powerful impetus to overriding at the individual and organisational levels. While it is widely agreed that mental time travel is crucial to human (research has identified relevant underlying neural substrates, see Botzung, Denkova and Manning 2007), there are few investigations of the ways in which individuals deliberately use mental time travel in For example, in choosing a delayed reward, do individuals mentally time travel to the future and construct an engaging scenario related to that reward? In addition, not all individuals engage in future planning and mental time travel to the same degree. One suggestion is that these individual differences may 290 Australian Accounting Review be related to the capacity for visual imagery. Research shows that individuals with a higher capacity specify more sensory features and experience more emotions when imagining future events than individuals with lower capacity. They also bring to mind events that are more important and more intense and Van Der Linden 2006). The researchers explain that visual imagery may serve to represent information about personal goals. More vivid imagery may mean individuals have more information about their goals, which is then used to construct more intense future events. What is not known is if these individual differences in visual imagery and mental time travel map on to individual differences in about the short and long term. Are the individuals who plan for the future, delay gratification and not reverse their decisions, individuals who also show high capacity for mental time travel and visual imagery? Attempts to answer this question are just beginning with one recent study (Atance and Jackson 2009) assessing developmental changes in young mental time travel ability, delay of gratification, planning and prospective memory (remembering to perform an action in the future). Research is yet to examine these links in adults. We know little of whether individuals can enhance their skills in these areas and how this might be best achieved. In this regard, researchers and practitioners may need to look towards the clinical and counselling fields where guided imagery is often used to project individuals into future states where, for example, smoking has ceased or social anxiety has been overcome. If individual differences are found, then and other strategies for nudging individuals towards more beneficial outcomes might be of greater assistance to those individuals who have reduced capacities in these areas. Similarly, it may be important to identify individuals who hold weaker future time perspectives because they may be more likely to make poor decisions and fail to plan suitably for the future. Such research is likely to have important implications for financial literacy education and financial planning services, as well as the appropriate mix and direction of government intervention and regulation. While holding a short time horizon and weak future orientation has been associated with preferring immediate rewards over delayed rewards, further research is required to tease out the implications for financial decisions for the long term. We also know little about how the context may interact with individual tendencies in this area. For example, how does the shortening of CEO tenures (and corporate time horizons) impact on future time perspectives in relation to the decisions they make within organisations C 2009 CPA Australia Overcoming as opposed to those they make for themselves? As Laverty proposes, corporate cultures that display trust in individuals to achieve accomplishments, rather than seeking continual evidence of progress and contributions, provide confirmation of a longterm orientation, as does the instigation of units within organisations that are devoted to exploring opportunities for future success with agendas and goals with long time horizons. Examining time horizons at both the individual and organisational level and how they interact appears germane to addressing shorttermism at an organisational level. Redesigning financial reporting, governance and investment practices Recently, a number of groups, including the Marathon Club (2006), CFA Institute (2006, 2008), Committee for Economic Development (2007) and the Institute for Sustainable Futures (Atherton et al. 2007b, 2007c) have made recommendations in relation to A number of commonalities pervade the reports, including the redesign of financial reporting to include an end to earnings guidance (which is seen to promote speculative trading rather than investing, although see the arguments above that the issue is how the information is used), the overhaul of incentive compensation plans (for example, linking them to performance objectives or models), addressing short CEO tenures (moving towards stewardship models), the promotion of succession plans that emphasise growth of internal managerial talent (encouraging deep knowledge and organisational trust and memory), and the communication of value building (including reporting). Such strategies are in alignment with many of the approaches advocated recent theory and research to address shorttermism. Recent research also shows that individual and organisational dimensions need to be incorporated into the debate, along with consideration of the processes underlying human and how these can be harnessed to design and encourage more effective practices. Conclusion In this paper, has been viewed from a number of perspectives. Humans show an evolutionary predisposition towards the short term, but also an evolutionary capacity for thinking about and designing the future. There is evidence to suggest that these systems of thought and behaviour can operate in tension to each other such that certain environmental conditions (context and culture) and individual capacities (for C 2009 CPA Australia K. Irving example, for and mental time travel) may nudge decisions, choices and behaviour towards either the short term or the long term. At both the individual and organisational levels, approaches that encompass deliberative processes, future time perceptions, mental time travel, and commitment to and engagement with the long term, are more likely to reduce the salience of the short term and pass processes that encourage individuals towards immediate gratification or to discount the future. Diluting or avoiding reward systems associated with is clearly important as is addressing ingrained organisational cultures, processes and routines that support a approach. Recent research shows that decision environments can be devised to enlist features of both systems to encourage a more farsighted orientation. Such research has implications for the architecture of a range of policies and strategies ranging from personal savings programs, investment choice and the setting of defaults, to business decisions and internal and external corporate governance controls. 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Course: Financial Accounting Theory (ACCT1077)
University: Royal Melbourne Institute of Technology
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