What 4-Year-Olds and Marshmallows Can Teach Investors
LONDON -- If you're going to invest, you first of all need to put some money aside. While it's possible to marry into money and/or inherit it, these aren't reliable methods; most people who accumulate wealth start off by spending less than they earn and save what is left over.
However, according to research from Santander, one in five Britons has no savings and many more have only a month or two worth of living costs tucked away in their rainy-day fund. These people never really acquired the habit of saving and, as a result, they live under a cloud of financial insecurity.
It turns out that you can get a pretty good gauge of someone's ability to save when they are just 4 years old, by seeing if they can be patient enough to wait 15 minutes before eating a marshmallow that's placed in front of them.
When you save and invest, you are choosing to increase your future consumption at the expense of the present. When you borrow, you choose to consume more today and less in the future, when you will be repaying the loan with interest. Though if you borrow for investment purposes, such as to get an education in a commercially valuable field, this should let you increase your future consumption.
The problem is that modern society is biased in favor of immediate consumption and against saving, often in subtle ways such as the laws that make opening a savings account much more difficult than getting a credit card, or government policies that deliberately stoke inflation.
The preference for favoring consumption over saving is something that can be conquered as an adult, but according to one of the most important pieces of psychological research that's ever been conducted, it is something that you learn in your very early childhood.
In the late 1960s, Walter Mischel's team at Stanford University developed what is nowadays known as the Stanford marshmallow experiment. It involved sitting a child who was 4 to 6 years old at a table in a room that contained little else of interest.
The controller then placed a marshmallow on the table and told the child that they could eat the marshmallow whenever they wanted. But if they could go for 15 minutes without doing this, then they would be given a second marshmallow as a reward. The controller then left the room.
The experiment was designed to test the children's level of self-control and to see how they reacted. Most children ate the marshmallow within three minutes, and only 30% managed to wait the full 15, with the most common methods of self-control being to cover their eyes or turn the chair around so that they couldn't see the marshmallow.
Give me the child and I will show you the man
The psychologists checked up on the children after they had been to school for several years and found some startling results. Those who ate the marshmallow were persistently scoring lower marks in tests than those who didn't, and they were also far more likely to get into trouble.
The research continued into adulthood, and those who ate the marshmallow were generally less successful, more likely to smoke and/or become drug addicts, commit crimes, and have financial problems. The difficulty they had in controlling their impulses made it hard for them to save, as there was always something that tempted them into spending their money.
The marshmallow experiment turned out to be a fairly accurate predictor of a child's future, their ability to manage their finances, and many other types of behavior. It beats most other forms of testing!
Let's face it. People who can't save won't become wealthy unless they win the lottery or the Tote Scoop6. So if you are looking to profit as a long-term investor, why not take a peek at "10 Steps to Making a Million in the Market," the latest Motley Fool guide to help Britain invest. Better. We urge you to read the report today -- while it's still free and available.
Control your impulses
I'm fortunate to have been taught impulse control by my parents at a very young age, and I'm convinced that it's one of the most important skills that children can acquire.
Mischel's research also showed that children could be taught the necessary self-control that would allow them to wait for 15 minutes. Adults can similarly learn self-control, if only by not confusing wants (nonessentials) with needs (essentials), something that the advertising industry specializes in doing.
The fact that short-term loans are advertised nowadays at interest rates of over 1,500% sends out the signal that many people have little or no impulse control. After all, anyone taking out such a loan is so focused upon the short term that they prefer to have 1 pound now instead of 16 pounds in a year's time.
Some parents teach their young children deferred gratification by buying them a few shares in Walt Disney (NYS: DIS) . They will probably already be fans of some of Disney's characters, and it's quite a nice feeling for them to own a bit of Mickey Mouse, Pluto, and Spider-Man.
Another way is to save for them, by setting up a regular savings plan using something like the Templeton Emerging Markets Investment Trust (ISE: TEM.L) . The emerging markets are where most of the action is probably going to be for the next few decades, so you might as well think about getting in early.
If you're a cynic (although there's a strong argument that this is the same thing as being a realist), you can make money out of the next generation of kids with poor impulse control by buying shares in the FTSE 100 (INDEX: ^FTSE) tobacco companies British American Tobacco (ISE: BATS.L) and Imperial Tobacco (ISE: IMT.L) .
If you're a parent or grandparent of a young child, I recommend looking further into the Stanford marshmallow experiment. This article is a good place to start, and there are some interesting videos on YouTube that show some of the experiments.
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The article What 4-Year-Olds and Marshmallows Can Teach Investors originally appeared on Fool.com.Tony Luckett owns shares in Templeton Emerging Markets Investment Trust buthe doesn't own shares in any of the other companies mentioned in this article. He likes marshmallows.The Motley Fool owns shares of Walt Disney. Motley Fool newsletter services have recommended buying shares of Walt Disney. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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