Short-Term and Long-Term Decisions and Your Brain
A new academic field called neuroeconomics involves the study of how people make economic decisions in ways that are not always rational. It is a field that combines neuroscience, psychology, and economics. I just came across a bit of learning from this field that has important implications for how people make trade-offs between short-term and long-term benefits, and I want to share it with you. I warn you now, however, that I’m sharing this because I think it’s interesting, not because there’s much we can do about it, at least not yet. If anyone has any ideas about how this bit of learning might change your policy or your perspective on business, I’d be interested in hearing that, too.
The short-term vs. long-term trade-off, of course, figures prominently in Martha’s and my work on the Return on Customer(sm) metric. Our belief is that businesses suffer economic damage regularly due to their irrational preference for short-term results. When a business favors short-term over long-term, it tends to engage in policies that are often self-destructive, attempting to build current sales up at the expense of long-term customer loyalty and re-purchase. We think businesses today are in the middle of what amounts to a crisis of short-termism, and the ROC metric is designed partly to help companies make more balanced, and intelligent, decisions.
What’s interesting from the field of neuroeconomics is a new finding that human beings actually evaluate immediate rewards using a different area of the brain than they use in evaluating long-term rewards. Experiments with MRI scanning indicate that longer-term rewards are evaluated with a part of the brain more associated with rational calculation, while shorter-term rewards are evaluated with a part of the brain that is more associated with emotions.
I hope you find this as fascinating as I do. I immediately began to wonder whether companies make their decisions using the more “emotional” parts of their collective brains whenever these decisions involve maximizing short-term rewards, while using a more rational part of their brain when evaluating longer-term rewards – things such as customer retention, customer satisfaction, re-purchasing rates, and lifetime value.
If you’re interested in further reading, a good article that is seriously academic but still very readable is from Science Magazine, October 2004:
http://www.economics.harvard.edu/faculty/laibson/papers/laibson_science.pdf
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