Personal Finance Education, Delayed Gratification, and Marshmallows

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Many people agree that there should be more personal finance education in school. This is supposed to be one of the keys to making the average person save more money, have less credit card debt, and invest wisely. You know, teach a high schooler the wonder of compound interest and the related trap of credit card minimum payments.

But I’ve perhaps the problem is even more basic than that. I recently ran across something called the Marshmallow Experiment by Walter Mischel. Check out this video (hat tip to Rob Garcia of LendingClub):

Here’s a quick summary of the original 1960s study. A group of four-year olds were put in a room with just a chair and a table. The kids could pick either a marshmallow, a cookie, or a pretzel stick. The child was then given an option. They could either eat one marshmallow right away, or if they waited until the researcher left and came back, they could have two marshmallows. How long could they wait? The researchers continued tracking them and found that those with the ability to wait were better adjusted, had less behavioral problems, and scored an average of 210 points higher on the Scholastic Aptitude Test.

Teaching Delayed Gratification
Along the same lines, I think a core requirement of good personal finance “education” is teaching people delayed gratification. Imagine how many adults wouldn’t be able to wait a year to get $500 versus getting $250 today. If you can exercise such self-control, then you won’t buy things on credit cards because you “gotta have it now”. You’ll be able to save money towards a retirement that may be decades away. It will be easy to spend less than you earn.

How do you teach delayed gratification? Since it would require years of practice, you’d want to start early and the responsibility would fall heavily on the parents. From an interview with Mischel in a related New Yorker article:

“This is where your parents are important,” Mischel says. “Have they established rituals that force you to delay on a daily basis? Do they encourage you to wait? And do they make waiting worthwhile?” According to Mischel, even the most mundane routines of childhood—such as not snacking before dinner, or saving up your allowance, or holding out until Christmas morning—are really sly exercises in cognitive training: we’re teaching ourselves how to think so that we can outsmart our desires.

But of course, not all parents will do that. So the problem is then how do we systematically teach children this skill in school, which is what researchers are working on now. In my opinion, that would be the ultimate in personal finance education. Because if you don’t have the ability to defer gratification, then learning about index funds isn’t going to help very much.

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  1. As a teacher of young students, I can tell you that most kids have very little patience. A ridiculously large number of Elementary age kids are “in charge” at home and mom does what they say when they say. This leads to spoiled kids and parents in denial.
    Teachers of young children can build good routines that force wait time. The class can work as a team for longterm goals (but they need small rewards along the way). As they get older the small rewards can be decreased and spread out more.
    They also need direct and specific education in topics such as the stock market and credit cards, and that can probably start by middle school age.

  2. CentsInTheCity says

    I have often wondered how much is nature vs nurture? Growing up my mother used to joke after reading a similar story about how I was the child that waited for a larger reward and my younger brother would always go for the immediate reward. We grew up in the same household, with the same parents, and yet we our natural dispositions are the complete opposite. He even had the benefit of an older sister assisting teaching him how to save at a very young age. To this day I am the saver and he is the spender, and I have been begging him to start saving in his 401k.

  3. This reminded me of a program I heard about on NPR ages ago:

    It’s a school-based program that aims to teach kids self-regulation. I think it sounds awesome because not everyone is lucky enough to have parents who teach them these basic life skills.

  4. This study is one I’ve been wanting to post about for some time but never got around to it. I definitely would have eaten the marshmallow right away when I was younger but I’d like to think I’d wait now.

  5. Another very important behavioral theory that relate to finance is loss aversion.

    Basically, when a person is faced with two identical situations where one is framed as a gain and the other is framed as a loss, their behavior is drastically different.

  6. Well, I think that study is somewhat flawed for these purposes, but I think you hit the nail on the head. It’s probably this aspect of our culture to just want, and want now, that is problematic. You can see this in how people always want the new car, the new ipod, etc. I took a course about investing during summer school for jr. high school and some people just tuned out while some people were really amazed at the power of compounding.

    I still remember going home to my dad telling him how 10grand can become a significant amount if you have 10% return annually, and my dad said no-one can get 10% consistently, haha.

  7. Yes, but then you have people like me who had the 10 grand ten years ago and don’t have the 100,000 we were promised in all those classes.

  8. @Justin,

    I don’t know what classes you were attending, but turning $10,000 into 100,000 over 10 years would require almost 26% annual return over all 10 years.

  9. We, as parents, should adopt the “marshmallow experiment” into our way of thinking on almost every level.

    Not just in the world of personal finance, but how about to teach the virutes of patience? Restraint?? Sharing?? And about a hundred other concepts that our society could use in large doses these days…

  10. Rachillarachis says

    Yesterday afternoon my almost 4-year-old son received $2 in the mail from his grandma. Later on in the evening I wanted to take him out for icecream and I gave him the option of saving his money and spending mine…which he opted for; but I have to admit that I was suprised that even though he was so excited all afternoon with the idea of spending his $2, that he would opt to save it 🙂

  11. Great article, and really true when you think about it. I think you hit the nail on the head with this one!

  12. love this study, I read about it a few days ago else where on the web…I will certainly be working on it with my son (currently 2 years old).

  13. GenuineMilwaukee says

    You are absolutely right on your last paragraph Jonathan – teaching the concept of index funds is of little value if you can’t keep your hands off of the money.

    But should schools really feal obligated to “systematically teach this [delayed gratification] skill to children in school”? Is it really the goal of education to provide all the skills to a child just because not all parents will teach it – such as dealing with frustration, or sharing in the sandbox. And if the schools did teach it, would it encourage even more parents to not interact with their children, because “the schools will take care of it”. Its a difficult problem because we see the obvious failures, and recognize it doesn’t seem like its getting better, but on the other hand don’t want schools to become even more like surrogate parents.

    That’s what is great about sites like this or getrichslowly – individuals can learn not just the technicals about money management (like credit default swaps – just kidding!), but also about the character that truely builds wealth – generosity, gratefullness, delayed gratification, frugality etc. Even if you arent a penny richer in your pocket, I guarantee your life will be. Keep up the good work!

  14. I think this is an EXTREMELY interesting and thought-provoking study, one that everyone who knows how to pronounce the word ‘psychology’ should be familiar with. The implications are enormous and far-reaching, for parenting, the whole society we live in, our cultural values, personal consumption/investment distributions. It just makes my mind spin when I think about the cask of knowledge Mischel tapped. Thank you for posting this here, I’d been meaning to dig it up myself, and I shall link you the reason why when I have some time.

  15. Thank you for posting this. We live in a world of “nothing down and no payments for six months.” We live in a nation of high incomes and low savings. It’s amazing our economy had the resiliency to recover from the hit it took recently in light of our low savings rate.

    I’ve long believed delayed gratification can lead to a better life whether it pertains to money, food, ones sexual desires or any one of a number of facets of our lives. Yet there is a balance. I’ve known people who have saved their whole lives and never let themselves enjoy the fruits of their self discipline.

  16. I want to know what happens when the researcher never comes back, and the marshmallow that the little kid does have grows stale and inedible (if they were dumb enough to keep waiting, undaunted by the researcher’s tardiness). What happens then?

    That’s the fundamental problem with what has happened in recent history regarding the housing bubble bursting, the bank/auto/insurance/etc. bailouts… Those who were “responsible” were implicitly sold the idea that if they did what was right and worked hard and did things the right way, they would be rewarded. What was their reward? Their neighbors used their houses like ATM cards, bought nice shiny new toys (while the responsible ones warned of disaster), and started a cascade reaction that has shaken the valuation of the whole economy to the core, not to mention the home values of those who were “responsible.”

    I feel like those of us who saved, who were responsible, were screwed because the irresponsible jerks didn’t get their karmic payback. There was no comeuppance in this, except maybe the “responsible” idiots feeling like suckers because we are footing the billS!!! for the greed and immaturity of those around us.

    I guess to a certain extent that is unavoidable, but this study points to something (I know I am going off a tangent). Still, the study establishes clear and fair rules that the children could decide on. The greater society we live in presents those rules as clear choices, but the results were not as promised.

    It makes me think of those bank commercials with the guy asking if the little girl wants a pony, then gives her a plastic one vs. calling out a real one for the next little girl. The whole point of the commercial is that even kids know how foolish the smoke and mirrors of banks and their ilk truly are. I feel the same looking at our government. They promised us two freaking marshmallows and now none are being delivered, and the marshmallow I have left is stale, undesirable, and if I had it to do over again I would probably spend the coinage on H&B and have partied hard and died young and at the top of my prime.

    Where is my second marshmallow, dangit! ;^_^

  17. I think it makes perfect sense for the schools to teach these skills. Ideally parents would teach them too, but I think a lot of parents are lacking these skills themselves. I know I still struggle with self-discipline and I think I would have benefited by receiving training in these skills in school early on. I have great parents, both of whom successfully quit drinking and have remained sober for decades, but I think they didn’t necessarily knew as much about child psychology and actually *teaching* self-control as someone who studied it would.

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