Could You Pass The Marshmallow Test?

Throughout the late 1960’s and early 1970’s Stanford psychologist Walter Mischel conducted what became known as the marshmallow tests. This test looked at the phenomena of delayed gratification in children. as part of the testing protocol children were offered either a small reward immediately or a larger reward if they waited 15 minutes.

Interestingly it was found that those children who could delay their gratification had life trajectories that were very different from the who could not. Everything from body mass index to educational achievement seemed to be reflected in this ability as a child to delay gratification.

It is not surprising that the ability to delay gratification is a key component of being able to trade successfully. Much work has already been done in this field and perhaps the benchmark in terms of summarising the profile of habitual speculators  is was the work of Canoles, Thompson, Irwin and France in their article An Analysis Of The Profiles And Motivations Of Habitual Commodity Speculators The authors were able to neatly sum up what motivated speculators –

He is both an aggressive investor and an active gambler. This trader does not consider preservation of his commodity capital to be a very high trading priority. As a result, he rarely uses stop loss orders. He wins more frequently than he loses (over 51% of the time) but is an overall net loser in dollar terms. In spite of recurring trading losses, he has never made any substantial change in his basic trading style. To this trader, whether he won or lost on a particular trade is more important than the size of the win or loss. Thus he consistently cuts his profits short while letting his losses run. He also worries more about missing a move in the market by being on the sidelines than about losing by being on the wrong side of a market move; i.e., being in the action is more important than the financial consequences. Participating brokers confirmed that for the majority of the speculators studied, the primary motivation for continuous trading is the recreational utility derived largely from having a market position.

I have highlighted several pieces that give a glimpse into what is important for the majority of speculators. My anecdotal observation over the past thirty years would confirm that it it is fair to generalise about speculators/traders. The motivation of most are the same as those highlighted by this study. It would also probably be fair to say that the majority of speculators would have failed the marshmallow test as children. This is why a tactic such as trend following is so hard for the majority of people because it requires a pushing back of potential gratification to sometime in the future.

What prompted me to start thinking about the marshmallow test again was this study on impulsivity in gamblers, its findings in adult gamblers are not dissimilar to those found in children who failed the marshmallow test. What the study found was that compulsive gamblers displayed a high degree of impulsiveness as defined as taking smaller rewards much sooner when compared to the normal group. For the majority of the trading population this is probably a spectrum issue as opposed to binary problem. I don’t think traders are neatly divided into those who are always impulsive and in need of instant gratification and those who can sit in a position with the calmness of a Zen master. All of us probably display traits of impulsiveness and an inability to delay gratification at times. the interesting point about Mischel’s original work was that he found that children can either adopt tactics fro delayign gratification naturally or they can be taught.

Mischel has consistently found that the crucial factor in delaying gratification is the ability to change your perception of the object or action you want to resist. Trying to avoid the tasty treat in front of your nose? Put a frame around it in your mind, as if it were a picture or photograph, to make the temptation less immediate. One boy in Mischel’s test was initially unable to wait, but, with careful instruction, eventually learned to hold out. When Mischel asked him what had changed, the boy replied, “You can’t eat a picture.” Mischel used a different kind of picturing when he quit smoking—he replaced his pleasurable associations with cigarettes with the image of the man in the hospital.

The key, it turns out, is learning to mentally “cool” what Mischel calls the “hot” aspects of your environment: the things that pull you away from your goal. Cooling can be accomplished by putting the object at an imaginary distance (a photograph isn’t a treat), or by re-framing it (picturing marshmallows as clouds not candy). Focussing on a completely unrelated experience can also work, as can any technique that successfully switches your attention.

Mischel’s research has repeatedly shown that, while some people are naturally better at cooling than others, both children and adults can learn mental distancing techniques to strengthen their self-control. Indeed, in the years since the original Bing study, Mischel and his colleagues have started multiple school initiatives to teach delay techniques to children and adolescents, especially to those in high-stress environments. They have also worked as consultants on children’s TV shows, including “Sesame Street,” on which Cookie Monster has undergone a self-control transformation in the last few years.