What the Marshmallow Test Tells Us About Our Financial Plans

Sam Swift, CFA, CFP®, AIF®

Jul 16, 2020

With Coronavirus cases back on a major upswing here in the U.S. and Arizona in particular, some lessons from behavioral economics swirled back into my memory. Specifically, I’m thinking of the marshmallow test. For those not familiar, this is a test invented by Walter Mischel, a psychology researcher at Standford in the 1960’s. Essentially, he asked children to sit in a room with a researcher. The researcher would leave one marshmallow on the table and explain that if the child could resist eating the marshmallow, then she could have two when the researcher returned in a few minutes. Some children pass and some inevitably fail (and are pretty enjoyable to watch in either case). The test has launched countless debates over the years about what the implications are for failing or passing children, but that’s not what I’m interested in here. To me, the test itself is important because it shows the challenge of self-control and delayed gratification, both of which require us to fight our own evolution and look further into the future. In essence, COVID has presented a worldwide marshmallow test—are we willing to make short-term sacrifice for the promise of something better in the future? The results thus far are…telling.

In any case, this blog isn’t here to dive into the complicated response to this disease (my expertise is not epidemiology or public policy), but since it got me thinking about the marshmallow test and behavioral economics, I figured we could dive into what implications it may have for us as investors. In other words, how do we prevent becoming paralyzed by a false binary choice between now and later?

Traditional retirement is rarely a top of mind goal for millennials today—they are more likely to switch careers multiple times, they are more interested in pursuing job satisfaction over chasing dollars, and, most importantly, retirement is really far away! When you’re 25, retirement is pretty abstract and it makes the challenge of saving for the future harder than it may already be.

I was talking to a client (we’ll call him Mike) early in his career the other day, and we were addressing this point. Retirement, in his case, was not a huge motivator for savings. In other words, it’s much more satisfying for Mike to eat the one marshmallow now if the tradeoff is that “retirement Mike” (whom he can barely even picture) is going to have a couple less marshmallows. Who cares about “retirement Mike” anyway?!

Retirement or Flexibility

But if he can “trick” himself into thinking of a future Mike that’s much more real, then saving becomes much easier. “Near-term Future Mike” wanted flexibility to switch jobs, to take a sabbatical, to start a family, or to buy a second home. Saving now will help him make those decisions free of major financial ramifications to his long-term plan and that became a key motivator. Retirement as motivation, in his case, was replaced by flexibility which was much more near-term in his mind.

On the other end of the spectrum, I was having a conversation the other day with another client who is already retired and in her 70’s (we’ll call her Sophia). She’s very witty and with a sly grin she frequently mentions to me, “I don’t have a long-term, Sam!” I disagree with her assessment (if nothing else, she needs to stick around for a lot longer to give me a hard time), but I do see her point. Foregoing the marshmallow now becomes less appealing if you’re not 100% sure you’ll be there when the researcher comes back with two marshmallows.

Focus on the Plan

It’s a difficult balancing act since none of us know exactly how long we have. I have quite a few clients at similar stages of their life that weigh the security of making sure the money is there almost too heavily—sometimes to the point where they are missing out on things that really matter to them today. The solution to tricking our natural psychology in this case is to create a disciplined plan that makes the decisions for you.

In the case of Sophia, we decided to push the limits on charitable giving (her preferred way to spend her money) in good years, like 2019, and pull back in bad years, like 2020. This results in making sure that whatever we spend down in any given year is sustainable, but it also allows her to charitably give much more than she could if we were solely focused on her long-term security. In other words, take the decision out of her hands as to whether we should eat the marshmallow now or wait for the two.

That balance between your present self and your future self can be hard to master. We want to know we’re okay long-term, but we also need to live our lives today. Like most things around investing and financial planning, our natural emotions are often our own worst enemy. Find a way to take them out of the equation and your financial outcomes will very likely improve. Rather than a binary choice between now and later, you can create a plan that satisfies both.

Now, where’s that bag of marshmallows? I have a craving.

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