The most important index you've never heard of*

It's 2024, we're awash with indices, do we really need another one?

Yep, it’s the Buxton Index.

It's not an investment index, but it defines something important to all investors, clients and advisers - decision timeframes.

As I’m writing this, it doesn’t have a Wikipedia entry. I found it in a paper written thirty years ago by a venerable computer scientist, Edser Dijkstra.

In the paper, Dijkstra talks about the challenges of academia and business working together. The points that he makes also map onto the relationship between clients, advisers and investors.

It's simple and powerful - if we use it thoughtfully, we can create better conversations and avoid predictable problems. It's time to polish it up and get it into common usage.

Dijkstra writes clearly, so I’ll let him introduce it in his own words:

‘…..the Buxton Index, so named after its inventor, Professor John Buxton, at the time at Warwick University.

The Buxton Index of an entity, i.e. person or organization, is defined?as the length of the period, measured in years, over which the entity makes its plans. For the little grocery shop around the corner it is about 1/2, for the true Christian it is infinity, and for most other entities it is in between: about 4 for the average politician who aims at his re-election, slightly more for most industries, but much less for the managers who have to write quarterly reports.

In short, the index captures the planning period of an entity and highlights that within and across entities different planning horizons can create differential incentives.

‘The Buxton Index is an important concept because close co-operation between entities with very different Buxton Indices invariably fails and leads to moral complaints about the partner. The party with the smaller Buxton Index is accused of being superficial and short-sighted, while the party with the larger Buxton Index is accused of neglect of duty, of backing out of its responsibility, of freewheeling, etc. In addition, each party accuses the other one of being stupid.’

This gets to the heart of the matter. I think that we can all see how this could map onto the relationship between investment managers, clients and advisers.

Consider an institutional investor making hiring a manager. Here there will typically be three major parties. The investor, an adviser (which may be a consulting firm, or an in-house team) and the client.

It may not be explicit, but each of these entities will have a de facto Buxton Index. Note the phraseology around the Buxton Index is wide, ‘make its plans’. The defining feature of the relationship between an investor, adviser and client is performance.

Managers know, marrow deep, that generating performance is hard and that there can be no guarantees of when and how it will be delivered.

Clients and advisers understand that targets will rarely be hit in a linear fashion. However, the majority would (naturally) like to get paid consistently without the discomfort of underperforming the broad market or peers.

And here’s the nub of it. People often only find out their true capacity for discomfort and perhaps their true Buxton Index when they are experiencing pain.

Badly managed pain can shorten planning horizons and cause people to behave irrationally. For example, there is the potential for clients to terminate mandates when they perhaps should hold out and for managers to capitulate on their process because of internal or external pressure.

Let’s finish with Dikjstra:

‘The great advantage of the Buxton Index is that, as a simple numerical notion, it is morally neutral and lifts the difference above the plane of moral concerns. The Buxton Index is important to bear in mind when considering academic/industrial co-operation.’

The Buxton Index is simple and intuitive.

Imagine a world where it was routinely discussed, where everyone knew their Buxton Index and the factors that might skew it.

To butcher John Lennon, you might say that I'm a dreamer, but I hope I'm not the only one.

*probably