Delayed Gratification and Investing
Is Successful Investing Baked In?
Don’t Touch That Cookie (Yet)!
Maybe successful investing is “baked in” before we even enter kindergarten. That thought is prompted by an article I read earlier this summer about a long-term study involving willpower among four-year-olds.
That study tested four-year-olds for their ability to wait for a cookie or marshmallow treat. That is, to delay gratification for a greater gratification later. Turns out those who could wait longer were more successful in a number of dimensions…even decades later.
The research was done by Professor Walter Mischel at Stanford University (and colleagues.) The team tested more than 500 kids. Each child was placed in a room with a sweet treat on a nearby table. The adult then prepared to leave and told the child that if he/she waited for the adult to return in a few minutes, he/she would get two such treats. The adult then departed, and of course the child was monitored to see if and when the cookie or marshmallow was taken.
The researchers learned various things from this study. First, that there is a wide range of variation. They also learned that some kids employ a range of strategies to help them deal with the now-or-later tension.
Some would look away, or literally turn their backs on the temptation.
Some would sit on their hands, some would divert themselves with a song or chant, and so on.
Others just waited a few moments then took the bait.
But the initial findings were nowhere near as interesting—and useful—as the follow-up. Although the research was not originally set up as a longitudinal study (to track the subjects over time), a large number of the original subjects were tracked down in 2011 and 60 of the previous high-delayers and low-delayers were surveyed about their lives.
It turns out the high-delayers did better than the low-delayers in many ways.
The high-delay four-year-olds turned out to have significantly higher SAT scores in high school. The high-delay four-year-olds turned out to have far lower incidence of drug and alcohol abuse decades later. The high-delay kids hade fewer overweight adults.
But what about investing?
Did high-delay kids do better in the stock market? Well, the follow-up didn’t examine that dimension, so we don’t really know. But I’m betting Yes. I’m betting very strongly, Yes.
(And I’ve written to Dr. Mischel to ask if he might add some such information in another follow-up. Let me know if you’d like to be copied on any reply.)
Delayed gratification is the very essence of investing. We refrain from spending $1,000 today to have many thousands later. That’s what it’s about. And those who save and invest systematically, year-in and year-out, almost always end up with wealth that their less frugal peers can hardly imagine.
And it is my further belief that those who can and do forego consumption today for greater prosperity tomorrow are the same folks who invest systematically, stick to their strategy, and have more consistent performance over time.
Does this mean that our investing outcomes were pre-determined for us back when out biggest temptation was whether to snatch a cookie? I don’t think so.
Remember, those high-delayer kids found ways to encourage their own discipline (look away, sit on your hands, etc.).
We can (and do) use similar devices to do the same thing as investors. Have a plan. Write it down. Set up automatic deposit or dividend reinvestment plans.
OK, now you can go have a cookie. But just one!
Analyst, Cabot ETF Investing Systems
Editor’s Note: Robin Carpenter is the analyst and editor of Cabot ETF Investing System, which combines market timing and sector selection to beat the market over the long term. Over the past 10 years, Cabot ETF Investing System has earned 147.96%. Over the same period, the S&P 500 earned just 105.66%. Which means that if you’d put $100,000 into this system 10 years ago, you’d now have $247,960 having gained $42,300 more than the S&P 500.