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Applied to businesses, short-term horizons can translate into a NIMTOF (Not In My Term of Office) perspective: “If a major crisis occurs, I hope it is not on my watch.” The recent financial crisis illustrates this type of behavior. The prospect of a large annual bonus discouraged individuals from hedging their bets or considering the possibility of a financial meltdown such as the one experienced in October 2008.

What to Do? Think Long Term

These three principles suggest that we, as a society, must rethink our strategy for reducing losses from lp-hc events such as natural disasters, terrorism, and financial crises by developing long-term contracts coupled with short-term rewards. An example of such a strategy would be to move from the standard one-year flood insurance contract offered today under the National Flood Insurance Program to long-term insurance contracts tied to the property, so that individuals would not cancel their coverage after two or three years. Today many do just that when they have not suffered a loss and hence cannot make a claim on their policy.

Long-term insurance should also encourage individuals to invest in cost-effective mitigation measures by having either the insurer or the bank holding the mortgage offer a long-term home improvement loan. The reduction in annual premiums due to lower expected losses would exceed the annual costs of the loan for the mitigation measure.

Turning to other extreme events, we find that there are opportunities for developing long-term contracts that take into account the behavioral biases and heuristics utilized by decision makers. For example, the standard annual bonus system practiced by many organizations could be modified so that bonuses are contingent on multi-year performance. This might induce managers to more systematically consider the potential consequences of their immediate actions over time and to pay more attention to worst-case scenarios rather than hoping that they will not arise by the end of the current year.

In the same vein, presenting probabilities of extreme events in the context of a multi-year horizon may lead individuals to pay attention to the resulting outcomes. For example, rather than providing information in terms of a 1-in- 100 chance of an event occurring next year, one could indicate that the chance of at least one of these events occurring in the next twenty-five years is greater than 1 in 5.

GUIDING PRINCIPLES FOR YOUNG RESEARCHERS

Reflecting back on my own experience, I list below a few principles that have proved helpful to me in my efforts to gain insight into possible solutions for a particular problem and to convince decision makers that they should adopt a proposed course of action.

Researchers’ Principle 1: Make sure you are dealing with the right problem. I had a sobering experience in this regard when I spent a summer during my graduate years working at the Port Authority of New York on an optimal algorithm for assigning toll collectors to booths in the Holland and Lincoln Tunnels. I was given a set of constraints that defined the problem (e.g., toll collectors need to work the first and last hours of an eight-hour shift with two fifty-minute breaks during the day) and told to develop an algorithm for assigning collectors, given a specified number of booths that needed to be kept open at different hours of the day.

After designing a schedule that reduced the number of toll collectors from the current number, I was told by the managers in charge of the process that I really didn’t understand their scheduling problem. However, when I pursued this point they never indicated what additional constraints I should have taken into account. An obvious sticking point was that the algorithm reduced the number of toll collectors. I believe there would have been a better chance of developing a strategy that might have been considered by those who had to implement it if we had met at the beginning of the process and had discussed all of the relevant parameters.

Researchers