Knowledge is Power: Instant Gratification

Put a young child in a room, make a small reward available to him, and tell him that if he doesn't touch the small reward for a period of time, he will receive a larger reward. What happens?

• He grabs the small reward, or
• He screams, shouts, and yells in an attempt to get the larger reward sooner, or
• He quietly occupies himself, whistling, humming, walking around the room, patiently waiting for the larger reward.

In the 1970's, US Psychologist Walter Mischel conducted this study and observed all three reactions amongst the participants. He put a series of 4-year-olds in a room with a bell and a marshmallow. If they rang the bell, he would come back and they could eat the marshmallow. However, if they waited for him to come back on his own, they got two marshmallows.

The children who waited longer for their reward went on to have higher SAT scores, attended better colleges, and had better adult outcomes. Those who rang the bell sooner went on to become bullies, had worse teacher and parental evaluations, and were more likely to have drug problems by age 32.

Self-control is a deeply-rooted behavior, but can be improved through consistent reinforcement and conscious decisions. Children subjected to the same test repeatedly got better at it over time. Children with parents who demonstrate self-control, who use every opportunity to teach self-control and demonstrate the rewards, demonstrate an improved self-control themselves.

What relevance does this have to personal finance? Self-control in personal finances takes practice, perseverence, and determination. We have to teach ourselves, through conscious decisions, to save rather than spend, and to wait for the right opportunity rather than jump at the first opportunity. I will use an extension of the Mischel experiment to demonstrate:

Take an adult who wants a new television that costs $1200. Put the adult in a room with a new television, a credit card, a cash account with a slowly increasing balance, and a bell. The adult can ring the bell, swipe the credit card, and walk out with a new television and a credit card balance, or he can wait until the cash account balance exceeds $1200 and walk out with the television and no debt. What happens?

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