Patrick McKendry

It’s hot outside. That might be an understatement. It’s actually some of the hottest it’s ever been outside. On July 3, top temperatures were recorded at all-time global highs. On July 4, measurements beat that record again at 62.92 degrees Fahrenheit.¹ The Earth registered the hottest month on record in June. The month’s 61.79 degrees Fahrenheit was nearly a quarter of a degree above the prior record, an astonishing increase for global temperatures that often move only by hundredths of a degree.² July will be even hotter and Death Valley, CA is forecasted to hit an all-time record high of 130 degrees Fahrenheit this weekend.³ Experts note that the high temperatures are increasing the chances for this year to be a record high for temperatures, over both 2016 and 2020. More likely is that 2024 will become the hottest year on record as the naturally occurring El Nino weather pattern arrives and brings warmer winter weather over the next few years.² To researchers, the daily temperatures are less concerning than the fact that there has not been a year colder than the 20th century average since 1976.⁴ Many share concerns that this July has likely had the hottest week on Earth since the end of the last ice age…120,000 years ago.^4,5

The concerns are no longer limited to academic circles. Pew Research shows that, across generations, Americans believe climate and sustainability should be a top priority. 57% of the Baby Boomer generation, 63% of Gen X, 71% of Millenials, and 67% of Gen Z agree.⁶ This surprisingly high level of consensus is likely driven by the increasing frequency of climate impacts on our lives. Record-breaking wildfires in Canada are impacting air quality in the US, extreme rains are causing flash-flooding and deaths in eastern Asia, rivers are drying up in the Middle East, and heatwaves across Europe are impacting tourism from Rome to Athens to Andalusia.⁷ As noted by Friederike Otto of the Graham Institute for Climate Change and the Environment, “This day is just a number, but for many people and ecosystems it’s a loss of life and livelihood.”⁸ Our insight into the impacts of climate change go back decades as the term became a major focus in 1980 and was the subject of U.S. Senate hearings as early as 1988.⁹ While systems are improving gradually, it often feels like there is hesitation to take action against primary causes and move towards promising solutions. Companies are hesitant to sacrifice profits today by investing in climate-friendly technology and consumers are hesitant to sacrifice convenience.

This tendency to focus on short-term impacts over long-term value is a challenge we face regularly for our teams at work. Tactics like learning-and-development training, paying down software technical debt, and investing in physical infrastructure all require up-front investment while the benefits are realized gradually and incrementally over time. The underlying cognitive errors are consistent for both why we underinvest in our teams and in our climate. Here, we will talk about why loss aversion makes it difficult for us to give up our current operations, why temporal discounting decreases how we value our future gains, and how the ambiguity effects throws off that balance. From there, we will look at tactics we can explore to make more balanced decisions.

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This versus That and Then versus Now

Most decision-making is just a question of trade-offs. If there were no cons to a decision and only potential gains, it would not really be much of a decision. Rather, we usually need to decide what we will give up in order to get something of value. With the climate as an example, we can individually decide if we would rather buy an electric or gas car for our next vehicle. Research shows that EVs emit significantly less emissions than combustion engines, even when accounting for battery manufacturing.¹⁰ But today those improved emissions also mean less convenience from range limits on long trips, lengthy stops to charge in comparison to the time needed to fill a gas tank, and - often - a higher ticket purchase price. For corporate decision-making, the trade-off is often the cost of replacing dated but functional infrastructure with more modern and efficient solutions.

For the longest time, few of us decided on those trade-offs in favor of the environment. This can largely be explained by three cognitive biases.

Loss Aversion - This bias describes our tendency to go above and beyond to avoid losing things we already have. I previously explained this bias in more depth, but - in short - we tend to make riskier decisions in an effort to keep what we have while acting more conservatively to earn potential gains.¹¹ With the climate, we often make the riskier decision that everything will work itself out or maybe be not as bad as forecasted and then decide to maintain our current individual convenience or organizational infrastructure.
Temporal Discounting - Also known as time preference, this fairly well-known bias describes how value created further in the future is discounted in the current moment.¹² On one hand, this is reasonable in financial and economic formulas. However, when applied to how people actually operate we can certainly consider this to be a cognitive bias as individuals apply discounting inconsistently based on a number of factors, such as age.

These biases display themselves with incredible consistency and are a problem on their own. But they get compounded by a third bias. I appreciate scientists, in part, because of the tremendous restraint they show in discussing cause and effect. Statements such as “It is certainly plausible that the past couple days and past week were the warmest days globally in 120,000 years”⁴ or that it is likely that most of June's warming is due to long-term human causes because so far this new El Niño is still considered weak.² To the rest of us, the causal drivers seem far more definitive. This probabilistic phrasing creates ambiguity.

Ambiguity Effect - People are not great at working with probabilities. In instances where an outcome is unknown or the situation is marked by a lack of information or clarity, we tend to choose the option where the probability of good outcomes are more well known. Said differently, we do not always pick the highest potential value, rather, we pick the highest potential assuredness. With the climate, we are in uncharted territory. This can lead us to favor the positive aspects of our current environment that are well understood over the less well-known favorability of future gains.

In our work, the same factors come into play. Instead of investing in updated climate technology like EVs or lower-emission factories, imagine we need to decide whether to spend money on a new analytics tool for our marketing team. First at play is loss aversion. We know that we will need to pay up to add the service with more premium and robust offerings demanding a higher price tag. We will also need to potentially add data team support in the initial configuration. Those costs will directly influence our bottom line and are basically guaranteed. The tool offers potential gains of better understanding our business, which is likely going to be greater in value. However, our tendency will be to act more conservatively in unlocking those wins. Next we encounter temporal discounting. We fully realize the value of today’s cost, but only feel a discounted sense of the future insights we could unlock over time. Finally, we know that the value of those insights are ambiguous. We do not know what insights we will find and how much benefit each will offer us. That will push our decision more in favor of the well-defined value of keeping the money we have today and not paying for the service.

Tactically, our best path forward here is counter-intuitive. Often, whether we are arguing for climate tech or for new analytics tools our default is to focus on how significant the maximum opportunity of potential value could be. There is potentially huge value in emission changes from investing in EVs and potentially huge value in investing in analytics software. However, the range of outcomes is wide and unclear. Instead, we should not focus on an ambiguous but big opportunity. Rather, we are often better served by highlighting lower value outcomes that are more or less guaranteed success. For the climate, this is why carbon offsets have had such high adoption. Despite their minimal value in reversing climate change, the impact on carbon emissions feels measurable and definitive.¹³ Similarly, when pitching a new analytics tool, we should focus on specific questions we would definitely answer that are top-of-mind right now. By providing a list of things we would go and do, we reduce ambiguity. By focusing on present opportunities, we eliminate issues of temporal discounting. And by focusing on what are nearly guaranteed answers in place of what are high-potential-value answers, we can rebalance the trade-off behaviors of loss aversion.

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Big, Bad Forcing Mechanisms

Reframing the problem to overcome cognitive decision-making biases can only get you so far. Particularly for large and entrenched problems like climate change, there are a myriad of other factors that come into play in driving what people do. Inherent comfort with the status quo can lead individuals and organizations to a point of stasis. Beyond that, when we try to describe organizational decisions we must recognize that incentives are also at play. Companies with investors, both public and private, often see their actions pushed towards certain outcomes as investors put their thumbs on the scale in favor of projects that match their investment timelines. Opportunities to improve the business’s health that realize pay-offs over the long-term are often ignored…until it is too late.

Frontier Communications had been on a slide since well before 2020. The telecommunications company, originally formed as Citizens Utilities Company in 1935, had been one of the major U.S. providers of long-distance telephone, broadband, and digital television service. Over the decades, Frontier expanded its business in large part through the acquisition of regional and rural providers. At the turn of the century, their network was largely built on a copper wiring network offering significantly slower internet speeds than what is available on more modern cable and fiber lines.¹⁴ That bad infrastructure became a big problem. In 2015, the company settled a class action lawsuit in West Virginia claiming that their service could not reach the data speeds it advertised. They further committed to spending $150 million in the region to improve its broadband infrastructure.¹⁴ In 2019, the state of California commissioned a report that concluded Frontier - and AT&T - had allowed their copper network infrastructure to degrade due to neglect starting in 2010.¹⁵ In those years, the company also took broadband funding from the Federal Communications Commission to improve its broadband service, a project which failed to meet its implementation deadline in 17 of 28 states where it accepted funding.¹⁵ Frontier, unsurprisingly, experienced high customer churn in its residential segment, which squeezed the business’s economics year after year. In April 2020, Frontier filed for bankruptcy, citing its failure to invest in fiber infrastructure as the primary driver of customer and revenue degradation.¹⁶

The company emerged from bankruptcy with a clear plan to its new investors on how it would evolve its business and grow its revenue - it would invest in converting its copper DSL lines to fiber broadband.¹⁵ The shift is so unbelievably straightforward and obvious that it’s infuriating. Frontier’s infrastructure had been their core problem for at least a decade. Rather than fixing it, the company tried to fix processes around it instead. The heavy investment in fiber, which now clearly seems to be the right investment for long-term success, was put off because of the short-term pain of investment. Ultimately, the only thing that could get Frontier executives to take the needed action was the big, bad forcing mechanism of bankruptcy.

For the climate, we see an eerily similar parallel. Outdated infrastructure is causing problems and the clear path is a shift towards more efficient, modern, and clean technologies. Yet, many companies are moving slowly, hesitant to invest now and sacrifice the short-term for some clear long-term benefits. The worrying aspect to this is thinking about what will be the big, bad forcing mechanism that drives a change in behavior. For our teams, we can heed the example of Frontier and think differently about driving change.

For leaders, we have to be willing to commit to changes. Frontier struggled to stop their profit freefall because they could not bring themselves to commit to the one thing they needed to do, which was upgrade to fiber lines. Leaders are tasked with the responsibility of making difficult trade-off decisions. It is good to not rush big decisions, but once it is clear what needs to be done, you should not delay. While Frontier may have felt that a fiber upgrade was too big of an investment, they ultimately made the changeover anyways. Now, they are years behind where they could have been by starting those upgrades sooner. Further, the delayed decision wasted additional resources that were put towards maintenance of the temporarily lengthened life of its copper lines. All of this also fails to mention the loss of customer goodwill that could minimize future revenue opportunities even after the upgrades are complete.

This might also mean creating your own big, bad forcing mechanisms. While this was bankruptcy for Frontier, there is no one-size-fits-all answer to how this can look. The famous story of Kimberly Clark selling its paper mills, the commodity upon which it built its business, to better compete in the CPG space against Procter & Gamble is one example of a forcing mechanism and commitment to change. Today Kimberly Clark does tens of billions in revenue every year.¹⁷ On a smaller scale, it can involve less dramatic change. This could look like reconfiguring the bonus target metrics for the sales team to shift behavior. This could also look like scheduling a product demo with the CEO for a new category launch to create accountability and a delivery timeline. Ultimately, a good forcing mechanism needs to capture the attention of the team and clearly redefine what actions are really valued.

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Conclusion

With all this being said, short-term thinking is not inherently bad. There are many cases in which it makes sense to think iteratively about how to make immediate progress while accounting for potential issues later on when they arise. The key to effective management and leadership is being intentional about deciding to take a short or a long term approach. Thanks to our inherent difficulties with forecasting, rationalizing probabilities, balancing incentives, and our tendency to seek reward gratification, we are likely to opt for a short-term view by default. Yet, there are so many cases where a long-term view is far more effective at maximizing organizational or societal value. We must consistently keep an eye towards evaluating which approach is right for a given circumstance and, when appropriate, asking questions and implementing forcing mechanisms that help us overcome our preference for immediacy. As a Greek proverb said, “A society grows great when old men plant trees whose shade they know they shall never sit in.” While the actions we can take today can help us progress, it is the investments we make for the future that help us to grow.

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References

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Record Heat & Our Short-Term Thinking Demise