I have been sharing financial literacy with children as young as age 7 since 2008. The main take away for children are cultivating a good saving habit i.e. save before buying and one lesson I will always share with the children is “The Marshmallow Test”.
So, what is “The Marshmallow Test”?
The Marshmallow Test was first conducted by a Stanford psychologist, Walter Mischel, in the 1960s. The test was simply having an adult to put a marshmallow in front of a child and tell him that he have two options
- Eat it now, or
- He can have a second one if he can wait till the adult is back.
The adult then leave the room and return about 15 minutes to check on the child’s action.
These children in the test were tracked until 1990s and the study showed those who are able to hold till the adult is back to get the 2nd marshmallow fared better in life as compared to those who choose to eat the marshmallow. This ability to resist temptation of an immediate pleasure in the hope of getting a better reward much later is called “delay gratification”.
How is delay gratification applicable in financial literacy? Before I get to that question let me share a story that I read recently which is similar to the idea of delay gratification. The story is in Chinese and I try my best to translate it here.
A wealthy man saw a poor farmer and thought of helping him to improve his life. The wealthy man will give the farmer some seeds to grow in three months time. During this period, he will first give the farmer a cow and told him to plough the field to prepare for the seeds. The farmer was very happy and started to work hard on the field. A few days later, there is still no food on the table. Life seems to be worse now because he needs to feed the cow and work in the field. So, he decided to sell the cow for a few sheeps. He slaughtered one sheep and kept the rest in the hope that more sheeps will be produced. He can then sell these sheeps which will be more profitable in the long run. However, there is no baby sheep after months and the farmer slaughter all the sheeps except for one!
He decided to trade the only sheep for some chickens so that he can consume the eggs and sell the extras for money. He will not run out of food! Days passed and there are insufficient eggs to keep him full, let alone to sell any extra for money. Finally, to solve his hunger problem, he decided to slaughter the chickens one by one.
When the wealthy man came back with the seeds, the farmer has no ploughed field, no sheep, no eggs, no chicken.
Now, think about it
- Do we charge our tour package to our credit card and pay back by installment instead of delaying the trip by saving up for the package?
- Do we look too much into the cost instead of looking at the potential investment returns?
- Do we think of the short term pain instead of the long term rewards
- Do we spend too much to enjoy today instead of saving for retirement?
How will you react in the marshmallow test? Will you get one or two marshmallows?