03/25/2014 12:34 EDT | Updated 05/25/2014 05:59 EDT

What the Marshmallow Test Tells Us About Money Management

Back in the 1960s, Stanford University researcher Walter Mischel conducted a famous study about self-control. After following the study group for 40 years, the researcher's findings about self-control continue to provide insight today into our collective psychology. That insight may be worth reflecting upon as we confront our current debt loads.

Dubbed 'the marshmallow test', Mischel's experiment was quite simple. His team gave hundreds of four-year-old children the choice to eat a single marshmallow on a table in front of them, or to wait 15 minutes until researchers returned to the room to get the reward of two marshmallows instead of one.

After checking in with those children as they progressed into adulthood, it seems that those who were able to hold out for the bonus marshmallow achieved greater personal successes in life. These included better social relationships, better marks and fewer behavioural problems.

A 2012 study at the University of Rochester suggested that the children's behaviours in Mischel's study may have been influenced by the degree to which they trusted the researchers' intention to actually come back in the room with the bonus marshmallow. The more they doubted the promises of the researchers, the greater the chance was that they would indulge in the immediate gratification of the marshmallow in front of them.

As the marshmallow test has been mentioned in recent media discussing consumer behaviours, it leads one to question its implications for our collective money management. If people are more likely to pay higher prices for products when they are in a cluttered room, or the thought of how something smells can make a person buy more (as recent consumer studies indicate), the marshmallow test may be of greater interest than ever. Our modern society, that enables immediate gratification on numerous levels, may be impairing our abilities to practice restraint.

One certainly has to wonder if Mischel's research findings have any implications for the growth of our collective debt loads. The outgoing Finance Minister preached frequently about the need for Canadians to reduce their debt. While these encouragements have yielded some nominal improvements recently in our household finances according to StatsCan, the very same report concedes that debt levels still grew in 2013. There was no wide spread determination to wait for a second marshmallow, if you will, as people bought cars at record levels, or as CREA forecasts house sales to increase 1.3 per cent in 2014.

Of course, much of this spending has been based on our currently low interest rates. None the less, Mischel's self-control hypothesis remains of interest. If we have been extensively warned about our debt loads and the fact that interest rates will eventually rise (making all that debt cost more to repay), the 'logical' action is to practice restraint and pay off the debt for a better outcome in the future. Yet, many are not waiting and are, instead, going for the immediate reward. Perhaps, like the children in Mischel's study, this is due (in part) to a lack of trust in the information being provided, or the likelihood of the suggested outcome.

Ironically, the concept of not fully trusting information may actually offer some promise in the marshmallow test of our debt culture. The Millennial generation, those being loosely defined as having been born between 1980 and 2000, are branded as having less trust in conventional institutions. Indeed, a recent Time magazine article identified that "Millennials: Trust No One But Twitter - A generation that's lost faith in institutions puts itself in the hands of social media."

Their lack of trust in traditional sources of information have led Millennials to be more likely to seek financial input and advice from trusted family members and friends than from financial professionals. While this, in of itself, may not be advantageous, their reservations about financial professionals have led them to become "the most financially conservative generation since the Great Depression" according to a report by the investment banking firm UBS.

Once again, being financially conservative and avoiding the advice of financial professionals does not equate to a superior financial plan. But this generation evidently prefers advice on saving than on investing, offering some promise for our country's future saving potential. Likewise, a new acknowledgment by Canada's lottery agencies that Millennials are not buying lottery tickets anywhere near the rate that their parents did offers promise that our society's financial psyche is shifting away from ideations of immediate gratification.

Through a great recession, perhaps we have imprinted upon a new generation the benefits of being patient and awaiting long term rewards. When it comes to debt in these uncertain times, being patient and awaiting the reward of a second marshmallow in the future may be as sage in wisdom now as it was in the 1960s.


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