Long-Term Investing and Marshmallows

Ashby Monk

It isn’t every day I link to an article from the Journal of Personality and Social Psychology. Today’s the day, as I was recently pointed towards a seminal paper by Walter Mischel, Yuichi Shoda and Philip Peak entitled “The Nature of Adolescent Competencies Predicted by Preschool Delay of Gratification.” And I found it really quite remarkable:

This paper offers an… “…analysis of the processes underlying effective self-imposed delay of gratification emerging from the experimental investigations of the ability to defer an immediate but less desired outcome for the sake of a preferred outcome contingent on waiting…

Basically, the researchers presented pre-school kids here at Stanford with a marshmallow and a promise to give them two marshmallows if they could wait 15-20 minutes before eating. The kids that delayed their gratification, and waited for the time to receive the second marshmallow, wound up being more socially and academically inclined in later life than those that couldn’t delay their gratification (it was a study over decades).

“The impressive correlates of self-imposed delay obtained with the present paradigm for both sexes and spanning many years suggests that such delay assesses a stable and seemingly basic cognitive and social competence that may have extensive implications for the individual’s cognitive and social coping and adaptation.”

Fascinating. Basically, if you can manage the tradeoffs of competing choices over time, then you’re smarter than those that just downed the goodies immediately. So, what does all this mean for finance and long-term investing? Good question. Does it mean that high-frequency hedge fund traders are thick, while infrastructure investors are enlightened. No, no. Well, maybe. But that’s not the point.

I actually interpret the findings of this paper creatively: I picture institutional investors playing the role of pre-schoolers in this experiment. I think to myself: If these organizations can delay their gratification (i.e., focus on long-term returns instead of short-term returns through governance and management arrangements), then these investors will likely be more capable and adaptive in the future than their short-term brethren. In other words, the metaphor suggests that a fund that can delay gratification will, in time, outperform the fund focused purely on the short term.

To be fair, that may be a bit of a stretch from some kids eating marshmallows. Notwithstanding, if delay of gratification is in fact an indicator of social and academic intelligence — which this paper indicates — why not assume that an institutional investor with the ability to think over the long-term is more intelligent than an investor purely focused on the short term? Personally, I think that’s a fair assessment. And since long-term investing is a function of governance, this post has really just been about me plugging good investment governance. Again.

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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