My finances, my projects, my life
May 18, 2024

Finances: understanding the value of delayed gratification

In a hyperconnected world that constantly demands our attention through messages, notifications and alerts, it’s hard to resist the allure of instant gratification. However, the expression “Patience is the mother of all virtues” still applies for those who want to consolidate their assets and forge their path to financial freedom. It’s time we rediscovered the value of delayed gratification!

What to remember

    • The importance we place on our current desires (instant gratification) is often much greater than the importance we place on our future desires (delayed gratification).
    • Learning to resist short-termism is essential for anyone who wants to manage their assets well in the long term.
    • Delayed gratification is the ability to resist the allure of an instant reward and hold out for a potentially greater future reward. This is one of the fundamental pillars of financial and wealth planning.
    • Delayed gratification requires self-control, which involves a set of skills that can be taught and learned.

Every day, our hyperconnected lives expose us to thousands of messages and requests that stimulate one of our most primal instincts: the need for instant gratification and short-term satisfaction. Regardless of the future, instant gratification is a survival instinct deeply ingrained in our brains and inherited from our ancestors whose main concern was where their next meal would come from.

This instinct, while very useful in a hostile environment where our immediate survival is the main concern, constitutes a real obstacle to achieving our long-term objectives. And for good reason: he who eats all his seeds today will have nothing left to plant tomorrow and nothing to harvest the next day.

It is now understood that instant gratification often triggers the release of dopamine in the brain, a neurotransmitter associated with pleasure and reward. Technologies and other applications exploit this false need for instant gratification to generate a behaviour. However, it is useful to learn to resist short-termism. This is especially true when it comes to making decisions to promote your long-term financial well-being. It’s time we gave more importance to delayed gratification!

The marshmallow experiment

Delayed gratification is the ability to resist the allure of an instant reward in favour of a potentially greater future reward.

Delayed gratification is your ability to resist the allure of an instant reward in favour of a potentially greater future reward.

This concept was studied as early as the 1970s at Stanford University through the famous marshmallow test. It is an experiment carried out with children by psychologist Walter Mischel and his team. Mischel tested the ability of young children to exercise self-control and not eat a marshmallow placed in front of them when they were left alone in a room for about 10 minutes. Each child was told that if they managed it, they would be rewarded with two marshmallows when the researcher returned.

This experiment gained global popularity and left many amused spectators feeling moved by the efforts of certain children to resist temptation, whether successfully or not. In reality, the main purpose of the study was to illustrate and analyse the benefits of patience for cognitive development, particularly for stress management and appreciation of hard work. This experiment also allows us to better understand the impact of patience in life in general.

When it comes to finances and investment, patience and delayed gratification are the keys to financial well-being. Like a child with a marshmallow, it is not easy for adults to temper their desires in the moment and focus on building long-term assets. We all have our marshmallows that entice us every day. Practising delayed gratification does not prevent us from succumbing to it from time to time. However, it allows us to strike a balance between enjoying the present and giving ourselves the means to maintain this well-being in the future.

Understanding the cost of impatience

If instant gratification is so appealing, how can we stop ourselves from giving in to it? Rather than focusing on curbing our desires, it is helpful to understand and focus on what we lose by being impatient. Let’s take investing and the constant race for performance as an example.

Investors who are persistently impulsive focus on the immediate benefits and costs. In doing so, they favour short-termism and succumb to present bias. Impatient people are under the illusion that they can time the market and take short-term actions to increase returns or avoid losses. These investors seek instant gratification by chasing performance and jumping from one stock or fund to another. They succumb to the illusion of market timing which can be very costly. While it is still possible to achieve some wins, it is not a strong long-term positioning. To put it in the words of Warren Buffett: “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.”

“If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes” (Warren Buffett)

Impulsivity can also be fuelled by loss aversion. Investors who can’t stand the idea of losing money tend to flee the market at the slightest sign of turbulence, turning what usually ends up being a temporary drop in portfolio value into a permanent loss of capital. This inevitably harms the performance of their investments in the long run. Having the patience to wait and break the cycle are fundamental qualities for successful investing.

Don’t follow the crowd!

Investors who are in a hurry and afraid of missing opportunities tend to take the lead from others when it comes to knowing how to react, and spend countless hours taking pseudo-advice from social media. They therefore forget that herd mentality in the field of investing can trigger stock market crashes: everyone follows the herd to the edge of the cliff. Not to mention the numerous scams touted by pseudo experts.

Patience can be learned

Making wise long-term decisions requires adopting a deliberate thought process that goes against our instincts. Fortunately, learning patience and self-discipline to practise delayed gratification can happen at any age. The marshmallow test is also proof of this.

Many follow-up studies and attempts to replicate the experiment have shown that this test only shows part of the reality. We now know that this test does not predict future success in a child’s life and that many variables such as cultural differences were not properly taken into account in the initial experiment. The creators of the test themselves are now convinced: self-control – and the ability to regulate one’s own emotions – involves a set of skills that can be learned.

Self-control – and the ability to regulate one’s own emotions – involves a set of skills that can be taught and learned.

How to successfully practise delayed gratification?

    • Fully believe in the benefits of patience. A follow-up study concluded that self-control was important, but that a certain amount of confidence in the future and the stability of the world was equally essential. To pass up a marshmallow today, you must be sure that the future reward will be better. Applied to finance, this means taking the time to study the fundamental principles of good wealth management and consulting a financial adviser to help you adopt a long-term perspective. It may even be useful to consult a psychologist to understand the reasons for your instability and impatience when it comes to money management. Learning to identify your behavioural biases is essential to avoid succumbing to them and making the right decisions.
    • Make concrete plans. If you don’t have a very clear idea of what you want to achieve with your money and over what time frame, you will have a hard time avoiding the temptations that arise on a daily basis. Take the time to define and visualise your goals, how you plan to achieve them and, above all, how long it will take. The more concretely you can define a long-term goal and visualise the benefits, the better. Children who passed the marshmallow test used distraction techniques to improve their self-control. They focused on something other than the immediate temptation. They purposely didn’t look at the marshmallow and focused on something else in the room. Similarly, visualise what you would like to achieve in 5, 10 or 20 years. Make a list of your goals and put it somewhere it can be seen easily.
    • Invest in good investment strategies and call on experts to help you pursue them. A financial adviser can help you develop a solid, long-term investment strategy based on your specific goals, priorities and preferences. It is also possible to delegate the management of your investments to them. This guarantees that the chosen strategy will be pursued and it prevents you from having to review your positions based on your impulses and passing demands that trigger your instinct for immediate gratification.

Getting to grips with your personal finances is not just about money management; it is also about time management.

    • Take control of your time management and determine what is a need, desire or impulse. When prioritising your purchasing or investment priorities, needs must always come first. When faced with desires, a good strategy is to wait a little before making a purchase. Not giving in immediately gives time to rationalise the desire and helps you make the right decision. Getting to grips with your personal finances is not just about money management; it is also about time management. It’s about knowing when to spend and when to save, when to enjoy the present and fulfil a genuine desire and when to prepare for the future. Finding this balance allows you to prepare for the future while enjoying the present in a way that is healthy.
    • Don’t live beyond your means. This common-sense concept is even more valid when you have assets or a comfortable income. Being aware of your means and being able to delay a purchase are some of the foundations of financial planning, together with the concept of delayed gratification. It is important to pay close attention to lifestyle inflation. The wealthier we are, the more money is spent on this inflation.

Delayed gratification is a fundamental pillar of financial planning. It is important to think carefully about our decisions now and how they will affect our future and that of our family. It is not a question of stopping ourselves from living in the present, but of also being able to take the steps that will allow us to continue to live well tomorrow. It’s all a question of balance.