Frank K. Martin, CFA

A Bird in the Hand is Worth…Two Marshmallows?

If we put you alone in a room with a marshmallow on the table, would you be able to resist eating it?  Of course you would.  Most of us don’t even like marshmallows anymore.  But back in the early 1970s, psychologists tested a group of four-year-olds who considered marshmallows a very tempting treat. Each was left unattended in a room with a marshmallow on the table, but only after the experimenters told them they could have a second marshmallow if they waited just 20 minutes before eating the first one.  Follow-up testing years after the 1972 Stanford Marshmallow Test revealed that those children who waited went on to do better in school, have more successful careers, and reported greater levels of happiness in their lives than those who ate the first marshmallow right away.

The experiment, of course, was all about deferred gratification, temperance, self-regulation, the ability to put off instant pleasure with the understanding that doing so would bring about an even greater reward later.

The children of the early 70’s had become adult consumers and investors as the new millennium dawned. With the Stanford Marshmallow Test by then ancient history, a contemporary picture of American consumers’ decision-making would have shown an unexpectedly large number of people chomping down on the first marshmallow rather than waiting for the greater reward.  What brought about the change in behaviors? No doubt the Great Moderation—the title of a speech by not-yet-FRB-chairman Ben Bernanke on February 20, 2004 heralding roughly 20 years declining macroeconomic volatility—was a major contributor to the slow drift away from deferring gratification. After averting presumed disaster following the crash of 1987 by flooding the financial system liquidity, the emboldened Fed became progressively more willing to apply the monetary policy elixir at the slightest provocation. Pavlovian-like, whenever Fed chairman Alan Greenspan, who acquired the moniker “the Maestro,” waved his easy money baton the economy and the capital markets shook off what was ailing them and rose in orchestrated harmony. The U.S. Central Bank relaxed vigilance about risk and even encouraged complacency.

Though certainly not single-handedly, the Fed contributed to altering the conditions of the marshmallow test. With spendthrift behavior not only accepted but expected, the stock market bubbled to stratospheric valuations that made the late 1920s look cheap. Material abundance supplanted scarcity. The need to choose between a half loaf now and a whole loaf later became meaningless when one could simply take out a home equity loan and buy the entire bakery. Once homes were transformed into ATMs, the die had been cast: Voilà, instant gratification. The children in the marshmallow test faced a different choice: A heaping plate of marshmallows now or two heaping plates 20 minutes later. Not surprisingly, America stuffed itself.

Human beings (and most other living species for that matter) have lived under conditions of scarcity throughout virtually all of history and are therefore simply not hardwired for abundance, real or imagined.  Today’s neuroscientists say that when they are presented with the opportunity, primal neural instincts compel creatures to consume far more than they rationally know they should.  They overlook long-term consequences in favor of short-term rewards.

In essence, that’s what we see today in many parts of American life.  The richest society in history grew richer by devising better ways to meet the demand for every resource and commodity previously considered scarce—houses, cars, sex, food, and electronic gadgets to name a few. But abundance has backfired. The gold rush for material things has trampled self-regulatory common sense. Today, a third of Americans are obese, drug and alcohol addiction is widespread, and personal indebtedness is oceans deep. Short-term speculation has displaced long-term investment and legalized gambling is everywhere—both with instant jackpots in mind.

Institutional oversight is not immune either. From governments to corporations, a revolving door of politicians and institutional investors all “eat the marshmallow” and leave their successors the empty plate. The end result will be a dwindling supply of producing Americans saddled with burgeoning public and corporate debt, and untold billions in underfunded pension liabilities, to say nothing of legacy commitments like Medicare and Social Security.

UCLA neuroscientist Dr. Peter Whybrow, author of the book American Mania, thinks the United States is by and large a victim of its own success because people are simply ill-equipped to handle the abundance of modern times, as opposed to the scarcity our ancestors endured.  He says it’s not that Americans are psychologically weaker than other people.  In fact, you’ll find the same emerging behaviors in other cultures where food and money are in rapidly growing supply.  Dr. Whybrow says even animals exhibit the same conduct in the face of abundance.

Pheasant Under (Magnifying) Glass

Consider “Henry the Pheasant.”  In England a few years ago, on the grounds of Blenheim Palace, the Churchill family estate, a harsh winter and the efficiency of local hunters took a nasty toll on the pheasant population.  In fact, only a single bird survived—and the locals affectionately named him Henry.  Having made it through the scarcity of food and safety the previous winter, Henry had the entire field to himself when spring arrived.  He made the most of it.  Without competition for food in the freshly seeded tract, he ate constantly.  Before long, Henry was enormous and he used his gargantuan stature to frighten other birds away and consume even more food.  Eventually, he got so obese that the locals noted he could no longer fly. Henry was indeed living the high life…until, suddenly, one day he disappeared. A fox ate him.