The Marshmallow Test in The World of Investing
In today’s world where we live off literally instant everything, can you resist the marshmallow temptation?
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I’m pretty sure most would have come across the video(s) of kids trying various cute and creative ways to resist the temptation of one small marshmallow, in the hope of getting two (or more) while they try and wait for a longer period of time. Originally conducted by Stanford researchers back in 1970 to better understand delayed gratification, it is more so relevant in today’s society as we live in a world of instant gratification.
Instant gratification is the desire to experience pleasure and fulfillment without delay or deferment. It is when we choose to make impulsive decisions for the sake of immediate pleasure. Much like sticking to a healthy lifestyle, like the choice of eating better or having a fitness regime, the same goes for your own personal finance.
Nobel prize winner Daniel Kahneman makes it clear that humans often have poorer decision-making skills due to our emotional nature, particularly when it relates to mental accounting. In this instance, instead of treating the entire portfolio as one, people tend to save and borrow at the same time in which they have different rules for. For example, saving and/or investing but having some form of debt at the same time. This strategy might work in favour when done right, only if we do not favour to emotional desires and choose to stick with the numerical data.
Being more prone to instant gratification might mean splurging on the latest trend, and only choosing to worry about the credit card bills later on. Or in the recent stock market exuberance, it means being impatient and doing foolish investments due to fear of missing out, peer pressure, or because it’s the hype and the “once in a lifetime opportunity” without doing proper research. Investing is not exactly the most exciting thing, quoting Paul Samuelson, it is like watching paint dry.
And with your personal finance, saving a little more each day will compound exponentially. The difference over the long term will be evident, and often with the younger generation, it is easier to take a short-sighted approach. 15 minutes or 15 years, so perhaps question yourself every now and then, do you really need this one marshmallow now, or do you think you can resist this and pass on for now.
