In 1972, Dr. Walter Mischel performed an experiment in which he presented kids with a marshmallow sitting on a table. The kids were told that if they can wait until some later time, they would receive a second marshmallow for their patience. Of course, there were kids that could hold out for the extra marshmallow and others that ate it right away. The kids with the ability to wait were said to have higher “impulse control.” Delayed gratification studies had been performed previously, but this was one of the first to follow up on the subjects over subsequent years. Over the years, they tested how kids with higher or lower impulse control performed in life (follow up study with results, Shoda and Mishcel, 1990). The results were convincing, people that displayed impulse control at an early age had higher coping and cognitive competence, higher aptitude scores, and general self-control later in life. A number of similar studies were launched that showed a causal effect between low impulse control and obesity, drug addiction, and criminal activity (The New Yorker article, DON’T!). Needless to say, the implications of the Marshmallow Experiment are powerful.

Now what does this mean for investors? We can assume that most investors have reasonable impulse control or they would have never made into or through college (personally, my impulse control went on sabbatical a few times during college). But there are still situations where the Id has to be tamed and the elephant kept in check. So what is an investor’s marshmallow moment? How about when an investment’s value increases beyond our expectations and our emotion tells us that “this thing has legs.” Our impulse is to scoop that marshmallow up and enjoy the ride as our investment trades even higher. The more difficult decision is to sell because the asset has met expectations. How about putting an idea, that a buddy told us about, in the portfolio before we do our full due diligence? How about holding onto that 40 basis point position, even though we know it has very little impact on portfolio performance and is a distraction from other research efforts?

Impulses and delayed gratification come in various forms. When it comes to fatty foods and narcotics, we may be rock solid, but when it comes to financial decisions, make sure you aren’t scooping up one marshmallow today at the expense of two tomorrow.