The Stanford Marshmallow Experiment | Why We Continue To Underperform

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There’s a very simple reason why investors continue to underperform in the stock market. It’s the inability to ‘stay the course’ with an evidence based strategy that’s been proven to work.

The main reason is of course is, delayed gratification/self discipline.

Delayed gratification is defined as:

Delayed gratification, or deferred gratification, is the ability to resist the temptation for an immediate reward and wait for a later reward.

From an investing point of view, this can be expressed in two ways. The inability to suffer through a draw-down (loss aversion) when a stock drops in price and, selling too early when a stock starts to go up. Both of which amount to serious under-performance in the stock market.

One of the best experiments every conducted regarding self-gratification was The Stanford Marshmallow Experiment.

According to writer James Clear, The Stanford Marshmallow Experiment was a series of studies conducted in the late 1960s and early 1970s led by psychologist Walter Mischel, then a professor at Stanford University. In these studies, a child was offered a choice between one small reward provided immediately or two small rewards (i.e., a larger later reward) if they waited for a short period, approximately 15 minutes, during which the tester left the room and then returned.

(The reward was sometimes a marshmallow, but often a cookie or a pretzel.) In follow-up studies, the researchers found that children who were able to wait longer for the preferred rewards tended to have better life outcomes, as measured by SAT scores, educational attainment, body mass index (BMI), and other life measures.

Here’s an awesome TED video, presented by Joachim de Posada where he discusses The Stanford Marshmallow Experiment — and how it can predict future success. It’s a priceless illustration for all investors:

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