The Marshmallow Experiment and your Finances
While many people who possess large amounts of money are very smart, others are not necessarily but where able to be at the right place at the right time. Being intelligent is not necessarily essential to creating wealth but what differentiates those two types of people? Also, what is the marshmallow experiment and how does this relate to it?
In the late 1960′s a StanfordUniversity researcher named Walter Mischel carried out a long study with marshmallows. He placed marshmallows on a table in front of 4 year old children that liked them. The children where told that they could take that marshmallow and eat it right now if they wanted or if they waited for 15 minutes they could have 2 of them. Some would eat the one right away but others would wait to receive 2. Basically it was testing children in their ability for delayed self gratification.
Then 14 years later Mischel interviewed and analyzed how the children where doing in various aspects of life. What he found was that the children who where able to wait and receive 2 marshmallows instead of just giving in to the 1 immediately generally had higher self esteem, more patience, better coping skills, optimistic, higher SAT scores and other benefits. This study is also quoted often regarding the ability to be financially more stable based not on intelligence but on the ability to delay gratification.
What can this experiment show us about our finances?
In the experiment children often did other things to distract them from the marshmallow. They would close their eyes, turned around, sang, or talked out loud. They basically distracted themselves from their desire for the treat. They tried to take themselves out of the context of the site. With finances, it is similar in that if you are trying to save money, don’t tempt yourself with things that you know you desire. Do your best to stay away from such things until the time may be right.
But skipping what is desired now, you will have more tomorrow. In the test, this is what happened to the children, they waited and earned double their investment so to speak. It is similar to compounding interest. If you can delay what you want now, you can have more tomorrow.
While in the experiment the children where guaranteed 2 marshmallows, in life and with investing there is not much that is guaranteed. (Albeit there are some that are such as principle protected notes etc) It is important to invest with what you feel comfortable with regards to risk. Also don’t just keep “letting the marshmallows” accumulate without ever cashing in some of your investment. You need to be able to occasionally have little pieces of your investments as you see fit. The key to remember here it to be a patient investor and learn to delay gratification. If you are needing help in doing so.