Time preference — Marshmallow experiment
Let’s start this article with a quote from Saifedean Ammous, who is a professor of economics at the Lebanese American University and a member of the Center on Capitalism and Society at Colombia University;
“As an economics professor, I make sure to teach the marshmallow experiment in every course I teach, as I believe it is the single most important lesson economics can teach to individuals and I am astounded that university curricula in economics have almost entirely ignored this lesson, to the point that many academic economists have no familiarity with the term time preference altogether or its significance.”
To understand the difference between Lower time preference and Higher time preference more vividly, contrast two individuals who start off with nothing but their bare hands, and differing time preferences: Harry has a higher time preference than Linda. Harry chooses to only spend his time catching fish with his hands, needing about eight hours a day to catch enough fish to feed himself for the day. Linda, on the other hand, having a lower time preference, spends only six hours catching fish, making do with a smaller amount of fish every day, and spends the other two hours working on building a fishing rod. After a week has passed, Linda has succeeded in building a working fishing rod. In the second week, she can catch in eight hours double the quantity of fish that Harry catches. Linda’s investment in the fishing rod could allow her to work for only four hours a day and eat the same amount of fish Harry eats, but because she has a lower time preference, she will not rest on her laurels. She will instead spend four hours catching as many fish as Harry catches in eight hours, and then spend another four hours engaged in further capital accumulation, building herself a fishing boat, for instance. A month later, Linda has a fishing rod and a boat that allows her to go deeper into the sea, to catch fish that Harry had never even seen. Linda’s productivity is not just higher per hour; her fish are different from, and superior to, the ones Harry catches. She now only needs one hour of fishing to secure her food for a day, and so she dedicates the rest of her time to even more capital accumulation, building better and bigger fishing rods, nets, and boats, which in turn
increases her productivity further and improves the quality of her life.
Should Harry and his descendants continue to work and consume with the same time preference, they will continue to live the same life he lived, with the same level of consumption and productivity. Should Linda and her descendants continue with the same lower time preference, they will continuously improve their quality of life over time, increasing their stock of capital and engaging in labor with ever-higher levels of productivity, in processes that take far longer to complete.
Standford Marshmallow experiment (conducted in the late 1960s);
Psychologist Walter Mischel would leave children in a room with a piece of marshmallow or a cookie, and tell the kids they were free to have it if they wanted, but that he will come back in 15 minutes, and if the children had not eaten the candy, he would offer them a second piece as a reward. In other words, the children had the choice between the immediate gratification of a piece of candy, or delaying gratification and receiving two pieces of candy. This is a simple way of testing children’s time preference: students with a lower time preference were the ones who could wait for the second piece of candy, whereas the students with the higher time preference could not. Mischel followed up with the children decades later and found a significant correlation between having a low time preference as measured with the marshmallow test and good academic achievement, high SAT score, low body mass index, and lack of addiction to drugs.
Capitalism is what happens when people drop their time preference, defer immediate gratification, and invest in the future