In Search Of Returns

The wonderful thing about financial markets is that they help to get funds from people who have them to people who have a productive use for them. In other words, they help to make things more efficient by enabling money to be put to good use.

The problem with financial markets, though, is that more often than not participants insist on measuring everything based on “return on investment”.

Why is this a problem?

Well, return on investment is a measure which is interested in how much cash you will get back, and how quickly. If you assume a fairly conservative required rate of return of 7%, then cash received ten years from now would be worth about half as much as cash received today.

As a result, this way of thinking focuses the mind on short term gains, and encourages us to ignore the future.

A similar problem can occur in a social setting.

The wonderful thing about community organisations is that they can bring people together, and give people with particular talents an opportunity to contribute towards a constructive goal. In other words, they make communities more effective by enabling people to put their talents to good use.

The problem with community organisations, though, is that more often than not the people who lead them insist on measuring everything based on a “social return on investment”.

What does this mean? And why is it a problem?

Well, if you are willing to come with me on this thought experiment and assume that all human life has value. Or more broadly, that all life has value, then we can quickly see how measuring things based on their “social return on investment” can lead to questionable outcomes.

Imagine, for example, that you are the bishop of a Catholic diocese based somewhere in America and a Muslim community based somewhere in the Middle East has recently been bombed by American troops causing a large number of civilian casualties.

This is certainly a human tragedy, but you may be less likely to make a public outcry than you would have been if the affected community were Catholic. In other words, since your actions earn you less social returns, you may be less likely to act.

A focus on financial returns encourages us to ignore the future, and a focus on social returns encourages us to ignore the needs of people who might benefit from our assistance the most.

In either case, by thinking about what we might get from the deal, rather than about how we can contribute, we limit our freedom to act and the chance to make the world an easier, better and more enjoyable place to live.