the marshmallow experiment

The Marshmallow experiment and How can it shape you as an investor?

June 13, 2018 0 Ankit Shrivastav

Introduction:

In the age of instant coffee, fast food, fast service and real time communication, where everything is available at the click of a mouse, being patient and waiting seems to be old school. The world of investments is no different.

Access to high speed internet, discount brokers, algorithm based trading and day trading in derivatives have now become key to making quick money in the stock market and investors are no longer content to buy and hold the stocks for long term.

So is the long term investing really dead? The answer lies in a very interesting psychological experiment called the Marshmallow experiment.

The Marshmallow experiment was conducted in Stanford University to understand the impact of patience and delayed gratification on our lives. The study was conducted to understand how delayed gratification shapes us and does it really help us in becoming successful?

This is how the experiment was conducted and this is what Stanford University found in its experiments:

The marshmallow experiment

The Marshmallow Experiment:

As mentioned earlier, the idea behind this experiment is to understand how delayed gratification shapes us as human beings and does it really help us in becoming more successful person in the future.

The experiment involved a group of children who were asked to sit on a chair and were offered a treat in the form of cookies, marshmallows, or anything they liked.

They were free to eat it whenever they wanted, however there was a condition. If they do not eat it for next 15 minutes, they would get two treats.

The instructor left the room and observed them from another room where kids were not able to see him. Few kids could not resist the temptation and ate the treat as soon as the instructor left.the few others waited patiently for some time but ultimately gave up and ended up eating the treat. Finally, a handful of kids successfully waited for fifteen minutes and were treated with bigger treats as promised. The experiment went for 15-20 years and kids back then were now adult grown ups and the researchers followed their life to see how they did in their personal and professional life.

Surprisingly, it was found that kids that successfully passed the test did much better in their lives in terms of school grades, personal and professional lives, and had better personal and financial health.

The relevance of this study has not been more important in today’s world of instant gratification. If you analyze one of the most successful investors like Warren Buffett, Peter Lynch, George Soros, John Templeton, you will find that they made fortunes by practising patience and delaying gratification for bigger returns tomorrow than being happy with little gain today.

The soundbites on television, stock recommendations on sell and buy in newspapers, SMS on day trading, etc. have made today’s investors more confused. Everyone seems to guarantee big returns in the shortest time possible. However, it is impossible to gain large in the short term unless you have sheer luck riding with you.    

Here are the key takeaways from this experiment that every investor can use in his investing journey.

the marshmallow experiment

You must have an objective:

Kids that successfully passed the test had a specific goal in mind. They had a clear objective to pass the test in order to get double the returns. Unfortunately, most of us do not care to make a financial goal in our life. Money influences all the aspects of our lives. Without any goal to reach, we will never achieve prosperity.

Having a clearly defined goal is important not just to work towards it, it also helps us keeping track of how far we are in reaching the goal and if there are some additional steps to be taken to achieve them.

All good things happen to those who wait:

The second and a very important takeaway from this experiment is that successful investors sacrifice today’s rewards for tomorrow’s prosperity. Just like the kids that sacrificed instant gratification for bigger reward in the future. In a world where everything is available at the blink of an eye, patience is something we rarely practice. If one can master this skill, there is nothing stopping him from achieving his goals.

Insulate yourself from the Noise:

With business channels constantly bragging about how by following their “tips” you could have made a fortune within a short span of time, and constant recommendations by brokers, whatsapp groups on buy and sell, it is hard to stay away from the temptation of “making easy” money in the short term. However, if you really want to make money from the stock market, it is important to insulate yourself from these “noises” and keep your focus on achieving the goals.

Be persistent:

Investing is a long term game, and you cannot expect to win unless you have discipline and persistence. That is why you must keep investing small amounts of money consistently for a long time, no matter what the market conditions are and stay invested all the time, resisting your temptation to cash out an book your profits.

This is the most difficult part of investing as in this game, you have to fight your own self. As Warren Buffett says ”An investor’s worst enemy is not the stock market, but his own emotions”   

There will be many times where you will be tempted to cash out if you are sitting on huge profits. But unless you have achieved your goal or have an emergency, it is not wise to pull out cash from your long term investments.

Conclusion:

By delaying instant gratification, you can achieve superior results in the future. It’s a trait that not only helps you in becoming a better investor, but also a better person in other aspects of life.

It’s a trait found in abundance in successful people and something that cannot be taught but can be learnt by practice and discipline.  

So if you are someone struggling to make profitable investment, try changing your habits for a moment, I am sure you will get fruitful results.