Would you pass the marshmallow test?

In 1972, psychologist Walter Mischel of Stanford university performed one of the most famous studies in social science. It was called the ‘Marshmallow Test’, and it studied the concept of delayed gratification.

In the study, a child aged 4 to 5 was placed at a table and a marshmallow was put in front of them. The child was then given a choice. They could either eat the marshmallow straight away, or wait 15 minutes to receive a second marshmallow.

Surprisingly, of the 600 children tested, only around a third could wait the full 15 minutes to receive the second marshmallow.

Though it was never an aim of the original study, the children were followed up in the decades that followed, and it was found that those who were able to pass the marshmallow test, also tended to be more successful and achieve higher academic grades.

A money test

In 1983, a similar test was performed by psychologist George Ainslie, who asked the question to adults, on whether they would prefer $50 now, or $100 in six months.

Surprisingly, a significant number of people preferred the $50 now.

The reason for this is that people love a sure thing, and tend to discount future rewards by a factor that increases with time.

Though this may appear irrational, there are often good reasons for it. For example, in many real-life situations a future reward may fail to materialise. And a second reason is that sometimes the person has a highly valuable use for the up-front money.

However, assuming all things being equal, the best option would be the latter option to receive the $100 in six months. But to receive that better option would require us to wait, and waiting can be hard to do. However, it’s the ability to wait and show patience, that makes us a better investor.

Delayed Gratification

One of the most interesting aspects of the Berkshire Hathaway story is that their success is largely built on just a dozen good decisions, where they bought a stock and held it for decades. Some examples include American Express and Coca-Cola.

At any time, Buffett could have cashed in his chips on these companies, and bought into the next big thing, but he knew that waiting would give him the best outcome.

Charlie Munger, who speaks frequently about the importance of delayed gratification said, “Great investing requires a lot of delayed gratification”.

The ability to delay gratification, can have significant benefits in many aspects of life.

For example, university students who focus fully on their studies, rather than the distractions of university life, may find that they are rewarded with a better (and higher paying) job.

If we are able to delay gratification, save our cash and invest it, we will find that over time this compounds into a significant sum. This is particularly the case when we invest for our retirement. The hard work we put into saving our money and investing it, can set us up for a happy retirement.

Even in the current environment where the cost of living is high, if we can put off much of our discretionary spending in favour of keeping our loans and expenses in check, it could be enormously beneficial down the track.

The occasional splurge

Though delayed gratification has a great many benefits, there are exceptions to the rule. Yes, money is important, but happiness is too, and time is not an infinite resource.

There are some experiences in life, such as a holiday overseas with friends or family, that can provide lifelong memories. Though on paper, we may be better off saving that money, it can sometimes be more important to spend it and enjoy it.

It’s all a matter of balance, and something that should be weighed up depending on your particular situation.

So how can we get better at delayed gratification? Here are four ways:

1. Think regularly about the benefits and rewards that delayed gratification can give you.
2. If you are tempted with instant gratification, such as buying an unneeded online shopping item, give yourself a few days to think it over, as this may help you make a wiser decision.
3. When making your financial decisions, think in terms of words such as ‘future’, ‘long-term’ or ‘self-control’. Research shows that by using these terms, it actually helps us to think more about the future.
4. Create some long-term SMART financial goals. These are goals that are Specific, Measurable, Achievable, Relevant and Time-bound.

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