Institutional memory can help lengthen and strengthen otherwise short and subjective minds. And institutional investment can help build public goods and flatten otherwise fat tails. In other words, institutions are the perfect antidote to the dark sides of integration and information. BIS central bankers’ speeches  5  Institutions in economics and finance These features of institutions – memory of the past, investment for the future – are particularly acute when tackling economic and financial policy problems. Very often, these involve difficult trade-offs between today and tomorrow: is growth today worth trading-off against higher inflation tomorrow or a greater probability of crisis the day after tomorrow? Not only are these choices difficult, but policymakers may have an inbuilt tendency to get them wrong. In economics, this is often termed the “time consistency” problem (Kydland and Prescott (1977)). The problem arises when policymakers have incentives to promise good behaviour ex-ante, but then renege on that promise ex-post. Policymakers are prone to making St Augustinian pledges to be chaste, just not yet. This is a classic myopia trap. The roots of this problem are often felt to be political – a desire to court near-term popularity to achieve re-election. Yet the true roots may be more neurological than political. Experimental evidence shows that people’s preferences are themselves time-inconsistent or “hyperbolic” (Laibson (1997)). People become increasingly myopic as payoffs become visible, elections approach, nest eggs near hatching. This is true for everything from pigeons pecking corn to mothers seeking pain relief during childbirth (Haldane (2010)).

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