Anyone who frequents this blog knows that I love exploring consumer psychology, group think, and how they change over time. We know that in order for an asset class to deviate markedly from its long-term measures of fundamental value and become an asset bubble, it requires an element of mass psychology. This typically manifests itself in a “this time it’s different” mentality.
But the influence of human psychology on the long-term financial well-being of a person or group of people is not limited simply to herd mentality and ‘pie in the sky’ thinking.
In one of the most fascinating studies, children were given the option of either eating one marshmallow now or getting to eat two marshmallows a few minutes later. It’s a basic test of self control. You can guess how most children fared. What is truly fascinating is that when this study became part of a longitudinal study where those same children were revisited 25 to 30 years later, the correlations between their self control early in life and measures of financial success and physical health later in life are staggering. I’ll discuss one incredible study in a moment, but first, have a look at this:
Isn’t that great?!
Now here’s one study that I found particularly interesting: A gradient of childhood self-control predicts health, wealth, and public safety.
While the study did not use the exact methodology as the marshmallow experiment, it did construct a highly reliable composite of childhood self-control that they used to place children in one of 5 quintiles (i.e. the bottom 1/5th who displayed the least self-control up to the top 1/5th who displayed the most). These children were followed for 30 years! Here’s the most interesting graph from the study:
You’ll notice that increasing levels of childhood self-control are positively correlated with socioeconomic status, financial planfulness, and income, while they are negatively correlated with financial struggles and other financial problems.
Interestingly higher levels of childhood self-control are also negatively correlated with criminal convictions and poor health in adulthood.
As an educator and parent, I wonder how we might teach this self-control to our youth. It is arguably the most important element to being financially independent. So how do I teach it? I also wonder whether overall measures of self-control have remained static over time or whether they have changed. My perspective from my experience is that children today seem to have less patience and self-control than when I was young….but that is strictly anecdotal.
When it comes to economics, I have even more questions:
- If self-control is a hallmark of future financial success for any one individual, is it also true of collections of individuals, i.e. countries? If so, how might we measure our collective level of self control at the national level? Would we point to record deficits and growing debt levels? Could we make the case that poor self-control might manifest itself in massive entitlement promises that arguably never should have been made and will represent an increasing financial burden on younger generations….just for the ‘instant gratification’ of an election win? In general, is the leadership of our country and other Western nations showing increasing or decreasing levels of self-control? How would we measure it? What is the implication on the future?
- If we looked at the personal level, would we look at the proliferation of credit card debt as an example of our collective lack of self-control? What about the incredible success of the ‘buy now pay later’ marketing? The falling savings rate (also a product of falling interest rates, I know….)? The negative savings rate in BC for the past decade?
- What about our perception of what we are entitled to? The massive expansion in ‘normal’ house sizes? Falling average down payment? The jump in CMHC insurance for mortgages with less than 20% equity to virtually all new mortgages (that insurance ain’t cheap!….but I guess when you have to have it now….) The massive rise in 35 year ams….sure they add six figures to the average total interest payments over a conventional 25 year am, but you save a couple hundred bucks a month! The jump in consumer spending as a percentage of GDP from 55% to 65% over the past 20 years? The massive growth in HELOCs since 2000?
At the end of the day, it is difficult to grow wealth without some level of self-control and delayed gratification. If this is true at the individual level, does it not make sense at the government level too? This is the message of great personal finance books like ‘The Millionaire Next Door’, ‘The Wealthy Barber’, and the ‘Finish Rich’ series and it holds true in life.
As the Micawber Principle teaches us, “Annual income twenty pounds, annual expenditure nineteen pounds, nineteen (shillings) and six (pence), result happiness. Annual income twenty pounds, annual expenditure twenty pounds…and six (pence), result misery.”
It’s a principal that many prior generations had to learn and learned it well. It’s a lesson that we would do well to learn….and learn fast.