Sometimes, the difference between success and failure comes down to a single marshmallow. Really.
In the late 1960s, Stanford researcher Walter Mischel began a study that found success -- measured by health, wealth, and marriage happiness -- comes down to one marshmallow. Those subjects who were able to resist popping the fluffy treat into their mouths right away were better off financially and psychologically in the long term than their peers who didn't have the willpower to wait to chow down.
It turns out that throughout life we're faced with similar marshmallow tests that determine our well-being. Here's how the study worked, and how we can use the findings to become better at managing our money.
The Marshmallow-Money Connection
Mischel's study gave four-year-olds a simple choice: They could have one marshmallow immediately, or two if they could wait 15 minutes.
The results: One third opted for instant gratification. Another third tried to wait but succumbed to temptation along the way. And an elite third waited the full time.
Here's where it gets interesting.
The rewards of waiting: Decades later, the kids able to wait for the larger reward ended up more successful by essentially all measures: They were in happier marriages, had better health, earned higher incomes, and reported greater career satisfaction. Oh, and they also scored 210 points higher on the SAT.
The problems with poor impulse control: Meanwhile, the impulsive group wound up as feared: Unsuccessful marriages, worse health, reduced sense of fulfillment, and lower income. They were also more likely to watch -- or appear on -- The Jerry Springer Show. (OK, I made that last one up, but you know it's true.)
Don't Let Your Inner Four-Year Old Run Your Adult Life
The marshmallow lesson underscores the decisions that have made our lives what they are. There's power in waiting. Whether it's a stock, a hurtful comment, or an inappropriate relationship, controlling your impulses can save you money, spare you anguish, and give your inner four-year-old what it really wants: another marshmallow.
Even if you lack impulse control, there are ways to catch up to the kids who waited around for the greater reward of more marshmallows.
3 Steps to Fight Your Money Munchies
There's a little piece of each kind of four-year-old in us. When we trade too frequently, it's because we're tempted to cash in on a gain, or avoid a loss. Frequent traders doubt the second marshmallow. Successful investors don't.
Consider a recent study by Dalbar Research: In a given 20-year period, the S&P 500 returned 13% annually. By extension, a self-controlled four-year-old could have gotten that in an index fund. But the average investor -- the grown-up four-year-olds who meant well initially but couldn't hold out -- earned only 3.5% per year. Meanwhile, active traders -- the immediate marshmallow takers -- lost 3.3% yearly... in an up market!
Don't be a loser. (Peruse those numbers above again: 13% v. 3.5% v. negative 3.3%. Make a plan and stick to it. Here are three steps to fight your money munchies:
- Write down why you're making the investment. Are you buying Whole Foods (WFM) because it's up more than 400% in the past decade and you expect more of the same, or because you dig the CEO's haircut? Inscribe it and you'll avert jumping in for a dumb reason in the first place.
- Write down why you'd sell. And do it before you even buy. I made the mistake of not bailing out of financials like Bank of America (BAC) earlier in the financial crisis. Granted, the carnage was unprecedented, but it's easy to slide your scale as bad events unfold, making the clarity of your sell reasons is as important as their quality.
- Act your age. You're a long-term investor holding for 10 years, right? Stop checking stocks daily like a nervous four-year-old. Can you count the number of times Netflix (NFLX) has been up or down more than 5% in a day? I could, but I won't: I'd rather ponder what CEO Reed Hastings' Facebook board membership means for the long term. Most investors -- not many, but most -- grossly mismatch their expectations with their intended holding periods.
Motley Fool analyst James Early owns no shares of companies mentioned in this article. He didn't disclose whether or not he waited to eat the marshmallow. The Motley Fool owns shares of Whole Foods and Bank of America, as well as having a short position on Bank of America. Motley Fool newsletter services have recommended buying shares of Netflix and Whole Foods as well as buying puts on Netflix.