One major indicator for your kids financial success (and you can teach it), according to science
Updated: Jul 12, 2023
In the 1970s, Professor Walter Mischell led a famous experiment[1] on delayed gratification at Stanford University. In the study, children were offered a marshmallow with the promise of a second treat when the researcher returned in about 15 minutes. The catch was they only got the second treat if they didn’t eat the first. Thus, they could have one now, or two later. It’s a classic experiment that has been revisited many times, both by professional instructors and at-home by parents. The original study is so famous because when it followed up[2] with those children years later it found that the group that delayed gratification had better outcomes as adults (healthier, better SAT scores, better economic outcomes). It seemingly provided a link not just between delayed gratification and success, but also could be used as a predictor of future success.
More recent studies[3] have been critical of the outcomes of the follow-up results and for good reasons. The original Stanford group was not very diverse, the participants were mostly the children of Stanford instructors and staff. It also doesn’t take into account the fact that delayed gratification is a trait that can be learned (or presumedly forgotten). One experimental result for a child can't be used as a predictor of future success.
Delayed gratification is correlated to success though. So how might delayed gratification be taught?
Two key components of delayed gratification have become apparent in more recent studies. The first[4] is the level of trust that the child feels in general and for the authority figure conducting the experiment. This matters a lot. If you don’t trust whoever is promising the reward, you aren’t going to give them any chance to take what is yours. The second[5] are the child’s own values they hold important. For children who focus on conservation values, the desire to maintain the current situation, there is a correlation to choosing the known, smaller reward over an uncertain reward in the future. Conversely, children who value self-enhancement values, where they know they will need additional resources in the future, are more likely to delay gratification for something larger in the future. This trait is similar to the growth mindset which can be taught by focusing on the actions of the child, rather than immutable characteristics.
The ability to delay spending money now to save for some future need is key to future success. That money needs to be saved in a way that the child will have some confidence that it will be available and that it can grow like compound interest, where its value is greater than that which was saved. There are probably yet more undiscovered levers to teach delayed gratification, but with these recent studies, we have two that intrinsically make sense for parents. Both can be taught by parents to help their children to be financially successful.
To demonstrate trust, first start by openly talking about money. This discussion will alleviate fears and uncertainties around money and allow for a more trustworthy environment. The second is to talk about those financial institutions and the government in trustworthy terms. Future success is going to require investments that have moderate risk and predictable rewards. The most common way to accomplish is to invest money in a bank or brokerage. Bank savings accounts are backed by the United States government with the FDIC program. Even if the bank were to fail or get robbed, that money is guaranteed. Talk with your kids about what that means.Take them to the bank, show them the security, and talk with the manager. Go online and show them how to see their balance. Make the banking process transparent to them. As you and your kids build out investment accounts (529s for college, IRAs for retirement) you can do the same thing to demonstrate access and security. Investment accounts are riskier. They may not be guaranteed like FDIC (though some have their own insurance) and the investments themselves can go down. Seeing our investments shrink and our money disappear is scary. Explain how investments work over time and how a diverse portfolio limits risks. Demonstrate trust in your own budgets, savings, and investments. Be open about concerns but explain why you trust your decisions and the financial institutions.
The other lever you have as parents is to teach your kids they can enhance their lives with planning and hard work through a growth mindset[6]. A growth mindset is one that focuses on the potential to grow, rather than static attributes. As parents, this means rewarding kids for their efforts and for overcoming adversity. As an example, when they do well on a test, it’s better to congratulate them on their hard work and how much they studied, not how smart they are. Similarly, if someone is good at basketball, don’t explain it as a factor of their height, but how they must eat healthy and exercise to be able to play so well. It’s also important with a growth mindset [7] to not limit kids to any specific outcome for their lives. Teach them they can be anything they want to be as long as they are willing to work hard, learn from their mistakes, and focus on their goals.
As parents, we all want our kids to do well and we want the confidence that they are going to be financially independent as adults with good money habits. Fortunately, we can teach some of the behaviors necessary by instilling trust in money management and by instilling a growth mindset that our kids can grow based on how hard they work and overcome obstacles. While both of these are great traits for kids, they will also contribute to a general ability to delay gratification for future rewards. Delayed gratification has a benefits not only for saving for the future, but also for many of the actions kids will need to take, such as exercising and studying. While the marshmallow test might not be a predictor, it does make for good entertainment and also drives home the importance of delayed gratification for future success.
Example of the marshmallow test:
References:
[1] Mischel, Walter, and Ebbe B. Ebbesen. "Attention in delay of gratification." Journal of personality and social psychology 16.2 (1970): 329. [2] Mischel, Walter, Yuichi Shoda, and Philip K. Peake. "The nature of adolescent competencies predicted by preschool delay of gratification." Journal of personality and social psychology 54.4 (1988): 687. [3] Benjamin, Daniel J., et al. "Predicting mid-life capital formation with pre-school delay of gratification and life-course measures of self-regulation." Journal of economic behavior & organization 179 (2020): 743-756. [4] Ma, Fengling, et al. "Generalized trust predicts young children’s willingness to delay gratification." Journal of experimental child psychology 169 (2018): 118-125. [5] Twito, Louise, et al. "The motivational aspect of children’s delayed gratification: values and decision making in middle childhood." Frontiers in psychology 10 (2019): 1649. [6] https://www.amazon.com/Mindset-Psychology-Carol-S-Dweck/dp/0345472322 [7] chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.studentachievement.org/wp-content/uploads/Carol-Dweck-Revisits-the-Growth-Mindset.pdf
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