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the parable of the marshmallow

May 13th, 2009 at 10:23 pm

Saving log - $1 tip box
Spending log - $16 groceries

I've been thinking about the

Text is marshmallow test and Link is http://www.newyorker.com/reporting/2009/05/18/090518fa_fact_lehrer
marshmallow test (a test for self control) and how it relates to saving money and investing. And money temperament in general.

Just to summarize, 4 yr old children were left alone in a room in full view of a marshmallow (or favorite food). The child was told beforehand that he could have two marshmallows if he could successfully refrain from eating the one he saw until a researcher came back. The child who could wait did better in school, etc, than the child who couldn't.

I wonder if the correlation holds for investors also - maybe its part of the 'investor's temperament' that Warren Buffett talks about. Or maybe not.

Of course to save money, you have to practice a form of the marshmallow test every other minute. Essentially instead of grabbing and eating the marshmallow, you delay buying or going into hock by buying, grabbing, and eating the marshmallow. Every so often, though, one should have and enjoy a marshmallow or two.

But investing is slightly different than saving. A lot of the tricks you can use 'saving' aka keeping yourself from eating the marshmallow - looking away, pretending its a sculpture of a marshmallow rather than a real one - are tricky when you are trying to invest. With investing you are trying to use money to buy cheaper money. Its more like trying to figure out by yourself when the marshmallow is at its whitest and tastiest, and eat it then. So you have to keep your eye on it to make a decision, but not keep an eye on it so you don't make a badly timed decision.

Half digested thoughts...

4 Responses to “the parable of the marshmallow”

  1. Broken Arrow Says:

    Hehe, nice title, and yes, I've read about that interesting study as well.

    My knee jerk reaction was that children are not suppose to have fully-developed cognitive reasoning just yet. Hence, the reason why they have trouble with delaying instant gratification.

    But when you think about it, that doesn't mean adults don't struggle with similar issues as well, and I agree that it can apply to active stock trading for example. I know I've made several bad trades myself this year that, upon reflection, was based more emotional than rational. Odd, because I know of this phenomenon, and yet, it appears that I ended up making those mistakes anyway.

    I then reasoned that perhaps it can't be helped to some degree simply because I AM human. Big Grin And I am going to be emotionally-influenced whether I like it or not. My strategy evolved a step further still, because of this realization. It's a lot more arbitrary, based on simple rules now, and is leaning towards Buffet's concept of buying-and-holding companies that one can be "serene" with.

    Back to the children, my absolute favorite one is the child who opened up one of the oreos, licked the cream filling, and put the cookie back with a grin on his face. This child made a brilliant display of innovative thinking. Yep. Nurtured properly, he's either going to be a great man some day... or end up behind bars. Big Grin

  2. miz pat Says:

    Did you know that there is an herb called the marshmallow that had a root with healing properties. No one would eat it. So mother's (we're talking pioneer times here) learned to make the root into a fluffy confection that children would eat because it was yummy. Now we buy marshmallows that only have the fluffy feature and sugar in them.

    To me that explains some of what's wrong with our economy. We substitute, and make businesses out of the fluff without the good ingredients that are healing.

    Just a thought.

  3. baselle Says:

    BA - yeah, that child was a favorite of mine also. Reminds me of Kirk's solution of the Kobayashi Maru problem in Wrath of Khan...it had the virtue of never having been tried.

    miz pat - a very good point that I had not considered. Not only do we make those cheery substitutions, but we, over time, forget that we did make those substitutions and we make bad decisions based on them. A lot of our economic stats suffer from that, esp the unemployment and the inflation rate.

  4. Broken Arrow Says:

    Have you seen the new Star Trek, the Younger Generation yet? (I made up that subtitle.) If you haven't, I won't spoil anything other than to say that Kirk does get tested on the Kobayashi Maru, and comes up with what I thought was a pretty funny answer.

    Thanks for that cool tib-bit, miz pat.

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