Sunday, October 4, 2009

The Marshmallow Test

What is the marshmallow test? First, watch this adorable short video:



Now for some background. The marshmallow experiment is a famous test conducted by Walter Mischel at Stanford University. In the 1960s, a group of four-year olds were given a marshmallow and promised another but only if they could wait 20 minutes before eating the first one. Some children could wait and others could not. The researchers then followed the progress of each child into adolescence, and demonstrated that those with the ability to wait were better adjusted and more dependable (determined via surveys of their parents and teachers), and scored an average of 210 points higher on the SATs.

Here is another video with some background information provided by psychologist Dr David Walsh:



Psychologists refer to the ability to wait for what one wants as deferred gratification while economists have a different but related term: time preference. Time preference pertains to how large a premium a consumer will place on enjoyment nearer in time over more remote enjoyment. Someone with a high time preference is focused substantially on his well-being in the present and the immediate future relative to the average person, while someone with low time preference places more emphasis than average on their well-being in the further future.

For example, a person with a high time preference will charge a plasma TV that they cannot currently pay for on their credit card charging them 20% interest. A different person with low time preference will wait until they have saved the money for the TV before purchase.

Deferred gratification and time preference are important concepts to understand within the context of the economic problems sweeping the United States. Briefly stated, it's all about debt. This chart provided by Karl Denninger of The Market Ticker should get the point across:


The rise in household, corporate and government indebtedness over the past thirty years points towards a people whom in aggregate have an ever increasing time preference. As the marshmallow experiment showed, a low time preference is desirable over a high time preference in almost all aspects of life. Even disregarding the experiment, anyone should have enough anecdotal evidence of their own by observing friends and family to see the connection.

The Federal Reserve, with their ever decreasing interest rates and relaxation in lending standards, are directly responsible for our problems. These Fed policies shift time preferences higher and plain promote irresponsible behavior. Worst of all, the problem is not only debt, which in most forms can be purged relatively easily by such vehicles as bankruptcy, but psychological, which is much harder to reverse. The United States will continue to fall further behind other nations in competitiveness and quality of life as long as these disastrous policies are maintained. America is failing the marshmallow test.
blog comments powered by Disqus