Obsession with short-term gain is killing the economy, says Alfred Rappaport.
  • Obsession with short-term gain is killing the economy, says Alfred Rappaport.
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Two San Diego authors have recently written books. One tsk-tsks risk-taking and the other celebrates it. Yet you can agree with both premises.

La Jolla’s Alfred Rappaport, professor emeritus at Northwestern’s Kellogg School of Management, has written Saving Capitalism from Short-Termism, published by McGraw-Hill, with a foreword by John C. Bogle, founder and retired chief executive of Vanguard Group, the world’s largest no-load (no sales commission) mutual fund group.

Alfred Rappaport: Look long term.

Rappaport argues that the 2007–2009 crash wasn’t caused only by excessive debt and speculation, combined with a mortgage bubble. Financial management’s obsession with short-term performance is also to blame. Companies think only about next quarter’s earnings, and that’s all that securities analysts, institutional investors, rating agencies, appraisers, mortgage lenders, and banks are concerned with.

“An essential cause of the epic collapse was a collection of perverse, short-term financial incentives,” writes Rappaport. “These faulty incentives drove a chain of private sector accomplices to take reckless risks with other people’s money.” Such risk-taking led to the collapse of financial institutions such as Bear Stearns, Lehman Brothers, Merrill Lynch, and the insurance behemoth AIG.

But this short-termism doesn’t only affect Wall Street; it’s a disease among almost all companies. Indeed, writes Rappaport, “With the possible exception of Berkshire Hathaway [the corporation led by Warren Buffett], no company today is close to being a full-blown, long-term, value-creating company.”

At a long-term, value-creating company, management allocates corporate resources “to maximize the present value of long-term free cash flows,” writes Rappaport. That statement requires some explanations: “present value” is the current worth of a future stream of money. “Free cash flow” is the cash that a company generates after paying for items essential to expanding its business. It’s the cash flow (money-in minus money-out) that’s available for distribution to stock- and bondholders.

Companies can always do such stupid things as slash research and development to jack up short-term earnings. Such moves can put the company’s future at risk. Corporations and Wall Street should focus on long-term free cash flow, not short-term earnings, which tell little about a company’s value, writes Rappaport. Earnings don’t account for the cost of capital, exclude cash outlays essential to growth and, worst of all, can be manipulated by management. Earnings calculations include all kinds of estimates and assumptions that can turn out to be very wrong — almost always overly optimistic.

Rappaport has suggestions for getting management to think long-term. Trouble is, such reform requires uprooting the greed that besets our society. That won’t be easy.

Todd Buchholz: Work makes us happier.

But Todd Buchholz, San Diego author and economist, says risk-taking is the natural state of things. His new book’s titillating title is RUSH: Why You Need and Love the Rat Race. We all dream of peace and quiet, but they are alien to our nature, argues Buchholz. We will be much happier staying stressed, pressed, and obsessed with our work. “The good life is full of stress and angst,” writes Buchholz.

He marshals evidence from scientific studies and quotes Shakespeare, Kierkegaard, Keynes, Freud, Twain, Camus, Kafka, Aquinas, Kant, Salk, and Galbraith, along with Woody Allen, Yogi Berra, and Donald Trump.

The book is hilarious, as Buchholz finds anecdotes to support his theses. President Cal Coolidge and his wife are visiting a chicken farm. Mrs. Coolidge asks how a small number of roosters can lead to so many fertilized eggs. The farmer says that the roosters perform their procreative tasks dozens of times a day. “Would you please tell that to Mr. Coolidge,” she says. Cal then asks the farmer if the rooster services the same hen each time. The farmer says no. “Would you please tell that to Mrs. Coolidge,” gloats the president.

Buchholz argues that work and the anxieties that come with it cause the brain to produce endorphins, which kill pain; serotonin, which keeps us happy; dopamine, which makes us more talkative and excitable; and adrenaline, which makes us drive a golf ball farther, among many things, and enhances other performances.

“Our minds and bodies need some stress,” says the author. What’s more, “Our frontal cortexes want us to try different things.” Buchholz says, “Neuroscientists report that when a person begins to take a risk, whether it’s gambling or ginning up the nerve to ask a pretty girl to the prom, his left prefrontal cortex lights up, signaling a natural high. Alpha waves and oxygenated blood surge to the brain. Sitting alone in a pup tent does not yield the same effects.”

Buchholz heaps contempt on those he calls “Edenists,” who believe that all we need to be healthy are peace and quiet. Forget Utopia and ignore the “happiness gurus,” says the author, pointing out that studies by several scholars who claimed they found peaceful tribal societies have been discredited.

Some of his proclamations will generate arguments from physicians. For example, he says, “I suspect that slow walking causes obesity almost as much as obesity causes slow walking.”

Critics will also note that Buchholz generally ignores people who dislike their work. Oh, he feels sorry for coal miners. But he doesn’t spend much time on people who are bored stiff on assembly lines, who hate their bosses, who know they will never be promoted but can’t leave their jobs because they have to earn a living. “Work makes us happier, more eager to wake up the next morning,” says Buchholz, but a lot of nine-to-fivers will argue the point.

It’s said that Europeans work to live and Americans live to work. This book, as delightful as it is, could use more comparisons of different cultures.

Buchholz’s book will be loved by type A personalities (whom he mentions only once in the book) and work addicts. Most surprisingly, he doesn’t include himself among the type A’s. I have interviewed Buchholz many times but met him only once, when we shared a podium. His credits include White House economist, Harvard teacher, coproducer of the Broadway hit Jersey Boys, author of eight books, TV personality, and essay writer for such publications as the Wall Street Journal, Forbes, and the New York Times. He is a high achiever, multitasker, and hard worker with a competitive personality. He loves his work and doesn’t understand those who don’t love theirs.

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nokomisjeff Sept. 28, 2011 @ 9:48 a.m.

When I went to NU, I was over on the other side and not at Kellogg. That being said, I have always kept up with the papers and scholarship of the academics in the B-School. Rappaport wrote a very interesting paper on ten ways to increase shareholder value, and although I don't buy every suggestion, the paper makes me question my own mindset. http://tinyurl.com/2vsek9q I like Rappaport, and my only problem with him is his buying into the cult of personality of the Oracle of Omaha lock, stock, and barrel.


Don Bauder Sept. 28, 2011 @ 2:35 p.m.

Previously, Rappaport wrote a best-seller named Creating Shareholder Value. He has written others. Best, Don Bauder


nokomisjeff Sept. 28, 2011 @ 3:33 p.m.

I heard about that but prefer to read the academic papers that are the genesis of the books to the books themselves.


Fred Williams Sept. 28, 2011 @ 9:38 p.m.

I agree. Read, whenever possible, the original academic papers, with particular attention to the disclaimers and raw data. Journalists rarely get it right when they write up their second or third hand reports, and even honest academics show their cognitive biases in their interpretations of the results.

Jeff, I'm enjoying the free downloadable classics on your blog...Voltaire, Mencken, Epictetus...great stuff.




Don Bauder Sept. 28, 2011 @ 10:20 p.m.

Maybe everybody in on this discussion should go to nokomisjeff's website for recondite wisdom. Best, Don Bauder


nokomisjeff Sept. 29, 2011 @ 5:09 a.m.

Thank you both. I get a lot of hits off both the classical downloads and the market related downloads. But for some reason, my complete download list of "Tom Swift" downloads seems to get the most hits of all. I didn't know that there were so many Tom Swift fans out there besides me.


Don Bauder Sept. 28, 2011 @ 10:17 p.m.

I am sure those academic papers are available online. Best, Don Bauder


Twister Oct. 1, 2011 @ 9:51 p.m.

Most academic institutions (with the notable exception of MIT) charge at 15-50 bucks for 24-hour access to one pdf file, no matter how small.

I'd be delighted to receive links to those which follow the ancient custom of complimentary reprints.


Fred Williams Sept. 28, 2011 @ 9:44 p.m.

Buchholz is absolutely correct in his prescriptions...but only for himself and those just like him.

For those who don't share his characteristics, however, his advice is interesting but irrelevant. Nassim Taleb points this out in his criticism of the self-help and business success genre of airport bookstore offerings. All of the authors are correct...but only for their individual cases, so you're best off ignoring their advice and just reading the books as collections of anecdotes.

Remember, only the "success" stories tend to get told. In the real world, however, we could all learn a lot more by looking into how people fail. If you want to avoid killing yourself driving a car, you should study how accidents happen, and learn about avoiding them. Focusing only on how to drive as fast as possible, learning solely from the rare racer who has a lucky enough career to tell the tale, is a recipe for disaster for most of us.




Don Bauder Sept. 28, 2011 @ 10:23 p.m.

Buchholz's book is a most enjoyable read. He does give short shrift to those who hate or are indifferent to their jobs. But he is making a point in an interesting and well-documented way. Best, Don Bauder


nokomisjeff Sept. 29, 2011 @ 5:13 a.m.

Fred you're 100% right in that you learn much more from failures than successes. I find mistakes to be great learning lessons and try to not repeat mistakes twice. That being said, mistakes have a lot of cousins and I meet up with a cousin twice removed of the earlier mistake and meet that new mistake head on. I notice that you have quite an enthusiasm for Taleb which I don't quite share with you, but it's a personal thing with me. I still respect his mind.


Fred Williams Sept. 29, 2011 @ 7:39 a.m.

Well, Jeff, I just re-read Taleb's Black Swan and it's fresh in my mind, but I suppose I could quote some Candide to make the same essential points about epistemological arrogance..., yet as a devout evangelical atheist, I like to turn to Ecclesiastes:

  • The race is not to the swift, nor the battle to the strong.

  • A man hath no better thing under the sun, than to eat, and to drink, and to be merry.

  • Wine maketh merry: but money answereth all things.

  • All is vanity and vexation of spirit.

  • The words of the wise are as goads.

  • He that increaseth knowledge increaseth sorrow.

Or I could quote MCPO Gaylor of Fighter Squadron 211, who told all us young squids:

"I've already *ing forgotten more than you'll ever learn, you little heads, and I guaran-God-*-tee I don't know all. I just know I don't know *. So remember you're not the one ing this horse, you're just holding it's head. You ain't in charge of this cluster* and never will be. Keep your head on a swivel, hang on tight, but be ready to jump out of my God way when you hear abandon ship."

(Hmmm...was there any point I was making, or am I just writing this to amuse myself now? Yeah, okay, that was fun...)


Don Bauder Sept. 29, 2011 @ 6:30 p.m.

Fred always make points. Best, Don Bauder


Don Bauder Sept. 29, 2011 @ 6:29 p.m.

Did Gaylor quote Ecclesiastes often? Best, Don Bauder


Don Bauder Sept. 29, 2011 @ 7:40 a.m.

You learn more from failures than successes because the successes may have been the result of luck. It doesn't come back often. Best, Don Bauder


Fred Williams Sept. 29, 2011 @ 7:55 a.m.

That's the most important point. Skill, hard work, character, intelligence...nice to have, but it's far far better to have good luck.

Being born into a rich family is probably the best luck of all, especially in America.

Being hard working, honest, diligent, and productive doesn't get you anywhere near as far as a large helping of luck in this world.

Cognitive scientists have repeatedly described the blindness of the lucky, who uniformly ascribe their success to their own efforts. That's why reading any business "success" book is a waste of time. Unless you get lucky in the exact same way, you're never going to get the results promised. You can never control luck, which family or country you got born into, or so many other factors in the world...you can only attempt to control yourself, but taking only your own actions into account leaves out the rest of the world's near complete influence over you and your fortune.

As Epictetus would explain, "that alone is in our power, which is our own work; and in this class are our opinions, impulses, desires, and aversions. What, on the contrary, is not in our power, are our bodies, possessions, glory, and power. Any delusion on this point leads to the greatest errors, misfortunes, and troubles, and to the slavery of the soul." (summary copied from wikipedia: http://en.wikipedia.org/wiki/Epictetus)


nokomisjeff Sept. 29, 2011 @ 10:19 a.m.

All my life, I've heard the familiar refrain on how "So and so is such a lucky person, they always win." I've been to the track and seen guys sweep the whole card of trifectas, much to the chagrin of the losers who attribute this feat to that elusive concept called luck. I've seen people throw away all of their money in pursuit of the long shot, afterwards labeling themselves as "Having a streak of bad luck." I've also seen people make 7 passes in a row on the crap tables and call it a streak of good luck. The concept of luck always intrigued me, and caused me many sleepless nights in grad school trying to prove, or disprove luck's existence. After a few months of thought, I eventually came up with a very elegant proof that denied the existence of luck. Ever since that moment, equipped with a new mind set, I have viewed all events as random occurrences that are subject to the laws of probability. This idea has served me very well over the past few decades, and allowed me to eliminate one more emotional distraction regarding my management of risk in trading, at the track, or at the poker table or wherever. I have simply denied the existence of luck for the past 35 years and chalked up all occurrences to probability and removing any emotional baggage. The rational side of my brain has overtaken the feeling side of my brain and this (small delusion?) works for me. If one wants to play around with and study random occurrences and very large numbers, this Poisson Distribution tool will give you hours and hours of fun. http://www.anesi.com/poisson.htm


Don Bauder Sept. 29, 2011 @ 6:37 p.m.

I agree. Luck is cyclical, statistical. You have great luck and it is probably followed by a string of bad luck. Of course, if you are playing poker with a bunch of dunces, it's not luck. Best, Don Bauder


Don Bauder Sept. 29, 2011 @ 6:34 p.m.

But look at all the scions of wealthy families who end up on drugs, in jail, often taking their own lives, greatly because they have not known the joy of work and success. Best, Don Bauder


Don Bauder Sept. 29, 2011 @ 6:25 p.m.

I'm the only one I know who hasn't read Black Swan. Best, Don Bauder


Don Bauder Sept. 29, 2011 @ 6:40 p.m.

One man's meat is another man's poisson. Best, Don Bauder


nan shartel Oct. 1, 2011 @ 7:11 p.m.

u r one fishy funk Bauder....hahahahahahahahaha

now that i know u speak French u'll never get rid of me!!


Don Bauder Oct. 2, 2011 @ 8:40 a.m.

I don't speak or read French. My wife does. On one trip to France, we ate with a family; the elderly parents only spoke French, so the entire conversation was in French. I sat there and never said a word. First time, I think. Best, Don Bauder


ImJustABill Oct. 1, 2011 @ 7:07 p.m.

Both books sound like they have made good sound observations about human nature.

I do not think the books theses are in conflict. I think Rappaport's book points out a major flaw in both corporate (and government) thinking, while Buchholz's book seems to offer an explanation of why human nature has led to this flaw in thinking.

I think the flaw in thinking - obsession about short-term results and ignoring long-term results - tends to be almost omnipresent in corporate plans and thinking. I don't know why more people aren't concerned about this. I don't hear many pundits express great concern about the extreme short-term thinking. And those that do are scoffed at (see Mr. Bauder's prior article which dares to question whether high-frequency traders looking for results in seconds are actually a good thing). As Rappaport claims I think there must be some flaw in the reward system in place now.

I honestly think this flaw in thinking extends to politics as well. Most politicians seem to assess economic plans only in terms of how fast they will "fix" the economy. Very few actually seem to be more concerned with long-term results than short-term results.


Don Bauder Oct. 2, 2011 @ 8:45 a.m.

This short term thinking absolutely dominates politics, too. One example: Obama should have ditched the healthcare bill and launched an infrastructure rebuilding program as soon as he got into office. But his economists convinced him that infrastructure programs go into effect with a long lag. He's too late with too little now. One of the biggest cancers of our system is that politicians only think from one election to the next, just as corporations only think from one quarter to the next. Best, Don Bauder


Twister Oct. 1, 2011 @ 9:38 p.m.

Do I smell pots boiling?

There are two kinds of professional; one puts the work first, the other the buck.

“They tell us we are wasting our time, but we are wasting our LIVES.” –Eric Hoffer

There is a sweet-spot on the stress-curve; it is just short of the apogee, just past which, one descends into a graveyard spiral. Did the ****ing egocentric “instructor” tell you that?

Pity. Making the MOST of it, ends up in the drink. THIN K.

“To be or not to be” still is the question (containing the implicit answer). Placing the self on a pedestal or behind a curtain is being untrue to it.

I started out with the “ambition” to join the millionaire’s club (no doubt now requiring a billion) that required making one’s first million by age 25. Somehow I decided that no matter what I did, I would get along somehow. I don’t know my net worth now, and what’s more I don’t have to give a damn. “I took the path less traveled-by, and it HAS made all the difference.” I can “look the whole world in the face, for I owe not any man . . .” The earth may not be better off for my presence, but it is a helluva lot less worse off than it might have been, “had I made better choices.”

Girls and boys, I’ve been in the ER five times this year, and let me tell you, there is a BIG difference!


Don Bauder Oct. 2, 2011 @ 8:50 a.m.

You are one of the few millionaires/billionaires who neither knows nor cares how much money he/she has. Congratulations. The nation is obsessed with greed and you aren't. Best, Don Bauder


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