What does this iconic 1972 experiment really tell us about financial decision-making? Richard Rawlinson examines new evidence and fresh insights from its author

Behavioural Finance

Illustration by Alex Esquerdeiro

It’s 50 years since psychologist Walter Mischel launched the ‘marshmallow test’ as a way of studying children’s ability to delay gratification. It’s easy to see how the seminal experiment, conducted at Stanford University in California between 1968 and 1972, has captured public attention ever since: hundreds of nursery school age boys and girls were tasked with sitting alone in a small room, in front of a single marshmallow; they could ring a bell at any time to call back the researcher and then eat the treat. However, if they could last out for 15 minutes, they would be rewarded with two marshmallows.

The spy camera’s results were a joy to behold: some scoffed the sweet as soon as the researcher left the room, others took a nibble from the bottom, hoping no one would notice, and some distracted themselves by closing their eyes, sitting on their hands, singing songs or even falling asleep. Around 25% of the children found the willpower to wait for the double reward.

But the full implications of the experiment only emerged decades later when Mischel caught up with the children as adults. He found that those who had passed the test were more likely to be successful — academically, socially and professionally — and less likely to be prone to obesity, alcoholism or drug use.

Mischel promptly wrote a bestseller about his life’s work, perhaps confirming the adage, “good things come to those who wait”. The Marshmallow Test, first published in 2014, explains how self-control can be mastered and applied to challenges in everyday life, from weight control to quitting smoking, overcoming heartbreak and, of course, making financial decisions. Mischel sees the studies not as predictors of later success or failure, but as clues to self-improvement strategies. The positive message for those of us impatient for instant gratification is that willpower can be taught.

“What we’re really measuring with the marshmallows isn’t self-control,” Mischel told The New Yorker magazine. “This task forces kids to find a way to make the situation work for them. They want the second marshmallow, but how can they get it? We can’t control the world, but we can control how we think about it.”

Mischel discusses the ‘hot’ and ‘cold’ physiology of the brain, the former being the limbic system that controls our impulses, and the latter being the prefrontal cortex that is concerned with complex thinking. “The hot system is great when you’re starving in the wild and looking for food,” he says. “It’s not good when you’re doing retirement planning.”

Mischel's conclusion is that the crucial skill is not willpower but 'strategic allocation of attention'

His conclusion is that the crucial skill is ‘strategic allocation of attention’. Instead of getting obsessed with the marshmallow (the hot stimulus) the patient children distracted themselves. Their desire wasn’t defeated, it was merely forgotten. If you’re thinking about the marshmallow and how delicious it is, then you’re going to eat it. The key is to avoid thinking about it in the first place.

He suggests we can learn self-control techniques that help to cool the immediate urges of the hot system. One such is known as ‘self-distancing’, or reflecting on one’s own situation from the fly-on-the-wall perspective of an outsider, theoretically making it easier to reappraise and resist urges. Then there’s the ‘pre-living’ approach, whereby individuals can imagine the outcome of taking their pension pot to the casino now, or preserving it for a later date.

Just as some of the children in Mischel’s test found resourceful ways to resist temptation (one boy decided to sit on his marshmallow), the secret is to find ways of making self-control less taxing (see Richard Thaler’s ‘Nudge’ theory, right).

The financial industry is making increasing use of the findings of psychologists and behavioural economists to make it easier to save. For example, a 2009 study by the University of California, Los Angeles, asked students to say how much of their salary they would put towards their retirement. As they made their choice, some students were shown photographs of their current selves while others were shown manipulated images that made them look much older. The research found that those forced to visualise themselves at retirement age put 30% more into savings funds. Bank of America now offers the same imaging software on its investment site, Merrill Edge.

The risk of temptation is as old as humanity but the way we combat it can be child’s play.

The economics of envy

Back in the day, we used to compare ourselves to our neighbours but, nowadays, we often know characters on TV better than the couple next door. Keeping up with the Joneses became keeping up with the Kardashians, and such exposure to the lifestyles of the rich and famous inevitably stimulates desire.

This is a premise of photojournalist Lauren Greenfield’s latest book, Generation Wealth, which chronicles the US’s obsession with bling status symbols over the last 25 years — a subject that consumes everything from body-image norms to credit card debt.

Greenfield’s previous work includes the 2012 documentary, The Queen of Versailles, about the struggles of property tycoons Jackie and David Siegel as the financial crisis hits, just when they’re building themselves a family ‘palace’ of record-breaking ostentation. Looking at some of Greenfield’s subjects, one at first wonders if she is perhaps laughing at their penchant for all things gold and shiny. She herself has said that, as the daughter of middle class academics, she first witnessed extreme wealth at private school in LA in the 1980s Reagan era. However, while her parents valued education and travel over designer clothes and fast cars, she admitted she was not immune to the pathology of our times, a desire to have it all that inspired her projects. In her book, she quotes author Fran Lebowitz about how Americans don’t resent the rich in the way some cultures do because they always imagine they will join them some day. She cites the election of President Donald Trump as a case in point.

This is the class struggle of aspiration rather than resentment, the pursuit of the American Dream — a media-driven illusion that never really satisfies. Some people in the book are not actually wealthy, like the white kids who emulate the luxury trappings of rappers and hip-hop stars.

Generation Wealth is informed by the social history of the boom and bust economy where easy credit has given people the ability to feel rich and to live out their TV-inspired fantasies. As economist David McWilliams once said, debt made us feel rich when actually it made us poor.

Pass Notes:

Professor Richard Thaler

Winner of the 2017 Nobel Prize for Economics, behavioural economist Richard Thaler is best known as creator of ‘Nudge’ theory. His work, summarised as ‘humans aren’t rational’, challenges the historic assumption of economics that individuals rationally pursue their goals. Acknowledging our conflicting selves — the ‘planner’ for the future, and the ‘doer’ who lives in the present — Thaler ‘nudges’ people to make decisions that are in their broad self-interest: it’s not about penalising them financially if they don’t act in a certain way, it’s about making it easier for them to make a certain decision. An example often cited is the UK pension policy: in order to increase low savings rates among private sector workers the Government established an automatic pension enrolment scheme. Making saving the default for employees is arguably more a gentle shove than nudge, but you get the picture.

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