Editor’s Note: Below, Nicholas Vardy explains how one study from the 1970s offers a unique perspective on wealth accumulation today.
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In 1972, Stanford psychologist Walter Mischel led a now-famous psychology study known as the Stanford marshmallow experiment.
Even 50 years later, YouTube is chock-full of videos of parents trying to replicate the test with their kids.
Still, I think the marshmallow test also offers insights on what it takes to accumulate wealth as adults.
Taking the Marshmallow Test
In Mischel’s study, children from the Bing Nursery School at Stanford – with a median age of 4.5 years – were put in a room where researchers could observe them.
The children had two choices.
They were offered the chance to have one marshmallow immediately or two marshmallows if they could wait a short period of time.
The researcher then left the room and returned after about 10 minutes.
If the child had held off on eating the marshmallow, they were given a second one.
Suppressing their desire was not easy for any of the kids.
About 30% wolfed down the marshmallow within 30 seconds.
Only about 30% could hold off for the entire 10 minutes.
During the 10-minute wait, the children made quiet songs, put their heads in their arms, pounded the floor with their feet and even prayed to the ceiling. (You can watch a version of the experiment unfold here.)
Stanford researchers conducted a follow-up study.
They found that children who could wait longer had higher SAT scores, higher self-esteem and better emotional coping skills and were less likely to abuse drugs.
The Marshmallow Test and Investing
There is one thing the follow-up studies did not test for: success in wealth accumulation.
Yet I’m willing to bet that the children who were able to delay gratification also became more successful investors.
That’s not such a great leap of faith.
After all, the key to wealth accumulation is saving money and then investing it.
And saving money is all about delaying gratification.
I’m willing to bet that the kids who could wait for the next marshmallow are the same ones who saved 10% of their income and invested it.
The ones who couldn’t resist the marshmallow are the ones who spent their entire paychecks as soon as they hit their bank accounts.
I have a friend named Klaus who would fall into this category…
Lessons From My Friend Klaus
Klaus is a smart, charming, socially savvy, well-educated teacher with a master’s degree in psychology from one of the top universities in the U.S.
Tragically, when Klaus was 11, his father – a police officer – died in the line of duty.
As a result, at the very young age of 18, Klaus received over $1.5 million in insurance money.
Klaus then proceeded to blow it all.
He bought luxury cars and apartments for himself. He took expensive trips around the world. He lived the high life.
By the end of his 20s, Klaus had blown through his $1.5 million.
Fortunately for Klaus, he’s taken it all in stride. Today, he’s happily married with a couple of kids. In addition, he works as a teacher.
Nevertheless, as he enters middle age, Klaus often wonders how his life would be different had he been more responsible with his money back in his 20s.
Now, Klaus is one of my best friends. And this is not a judgment of his character.
But I bet Klaus would have failed the marshmallow test. And as a trained psychologist, he would readily admit to that.
The lesson from Klaus’ story is that our ability to forgo today’s pleasures for tomorrow’s benefits has a massive impact on our financial lives.
A New Marshmallow Experiment
The Stanford marshmallow experiment measured the trade-off between gratification today and greater rewards tomorrow.
However, to make the marshmallow test more relevant to wealth accumulation, I propose a new experiment.
And this test would also test your innate entrepreneurial spirit.
Picture yourself at your nursery school. There is a single marshmallow and a die on the table.
The researcher gives you three options…
- Eat the marshmallow now.
- Hold off on eating the marshmallow until the researcher returns with an additional marshmallow in 10 minutes.
- Or roll the die.
Roll a six on the die, and you get five additional marshmallows. But if you roll anything else, you lose the original marshmallow.
Which one would you choose?
Would you take the money and run? Would you hold off in favor of something twice as good later? Or would you “swing for the fences” and risk losing it all for a 5X return?
Of course, I don’t know for sure…
But I bet kids with an entrepreneurial bent would roll the die.
After all, many entrepreneurs boast about how they spent much of their 20s sleeping on friends’ couches.
These entrepreneurs’ willingness to forgo even the basics of having their own apartments gave them a leg up on their high-spending, cubicle-bound peers.
I believe the willingness to roll the die reflects an entrepreneurial personality.
It rejects the conservative, rational approach of holding off on eating the marshmallow.
But it doesn’t do so in favor of today’s short-term pleasure.
Instead, it’s a bet on massive, if uncertain, gains in the future.
Which option would you choose?
Are you like my friend Klaus and live to seize the day? Or are you a conservative, long-term planner? Or do you think like the next Elon Musk?
Share your responses in the comments section below.
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