The Tragedy of the Horizon

By Shelburne, Vermont Financial Advisor Josh Kruk
May 19, 2020

The “Tragedy of the Horizon” is a concept coined by Mark Carney, the governor of the Bank of England, in 2015. Carney was giving a speech to Lloyd’s of London, the famous UK insurance company. The topic that evening was climate change, an obvious area of interest and source of future financial risk for insurance companies like Lloyd’s.

Carney’s point was that climate change is a long-term issue that will have a disproportionate impact on young people and future generations. Yet, the group charged with addressing climate change is primarily composed of current leaders in government and business whose time horizons both in terms of career and life expectancy are much shorter. In Carney’s words, “We don’t need an army of actuaries to tell us that the catastrophic impacts of climate change will be felt beyond the traditional horizons of most actors – imposing a cost on future generations that the current generation has no direct incentive to fix.”

The paradox of climate change is that it is probably the single most important long-term problem we have to solve, but at the same time, it is never the first item on anyone’s to-do list today. This article from the Brookings website discusses how poll respondents have prioritized various issues through time. The most important thing on our collective minds will shift based on the crisis du jour, but climate change, with its long-tailed and massively negative payoff, never rises to the top of the worry pile.

While decision makers are motivated by many things, job preservation and financial incentives are usually high on the list. The things they are likely to deem most urgent are the things deemed most urgent by the people who control their fate (voters, shareholders, customers, major donors, etc.). An unfortunate corollary of The Tragedy of the Horizon is that the generations most impacted, some of whom have yet to be born, possess very little of that control.

Yet, the silver lining is that when properly motivated, decision makers can and do drive results. Just recently, Congress was, in a matter of days, able to pass a $2 trillion stimulus package in response to coronavirus shutdowns. This from a group that tends to agree on almost nothing. The wolf was at the door, and they responded. And lo and behold, their approval rating shot up to 30% (yes, this is an extraordinarily high number for Congress).

In solving the Tragedy of the Horizon, then, the key seems to be about combining a sense of urgency with the proper motivational incentives. Having one of the two has proven insufficient. For example, public protests draw attention to the issue and certainly reflect a sense of urgency but most often lack the incentives to change behavior. Conversely, many of us likely feel some incentive to leave the world a better place for our children and grandchildren, who may not yet be in a position to drive those improvements themselves. But in the cacophony of daily life, the sense of urgency isn’t always there to compel us to pull the levers we have at our disposal.

And most of us do possess levers. Some possess more than others, but most of us have levers at least to some degree. Increasingly, there are examples of those levers being used to impact behavior relative to climate change, and we will explore some of those examples in future posts.

In the meantime, it is worth considering what each of us has control over and how that control can be leveraged to the benefit of future generations. Because it is that leverage that will ultimately push climate change closer to the top of the worry pile.

By Shelburne, Vermont Financial Advisor Josh Kruk

1. In that context, the Tragedy of Horizons is a concept that can be applied to many other things beyond the response to climate change. It can be applied to any situation where a mismatch in the time horizon exists, and where that mismatch impacts incentives and rewards. For example, pension reform is a can that is often kicked down the road until the threat of bankruptcy forces action. The more politically expedient thing to do is maintain current benefits and let the next administration deal with the issue.