“Any problem caused by a tank can be solved by a tank.” – Family Guy
The featured image is geology. Which is way cooler than what the class made it seem. This is one I took in Alaska.
The first all-night study session I that I did involved studying for finals the first semester of my freshman year at college. I do recall getting increasingly tired, and at 4AM I jumped in my car to buy, for the first (and last) time ever: No-Doze®. No-Doze™ was awful. I felt jittery. I felt my teeth moving around in my gums. I felt my eyes moving around in their sockets. It felt like there were bugs walking around on the inside of my skull. Thankfully, I was distracted by actual pain in my stomach (due, I’m pretty sure) to the No-Doze©, which is what kept me awake.
I ended up doing fine in my tests, but can only recall that “Cops On Streets Detain Crime” (Cambrian, Ordovician, Silurian, Devonian) and “Miss Pennie’s Panties” (Miocene, Pliocene, and Pleistocene). I think I’m missing a billion or so years of geologic history because there wasn’t a sufficiently naughty mnemonic involving underwear.
Oh, and I can also recall that No-Doze© is the work of the devil.
Looking back, it seems so simple. A little effort each day would have paid off at finals. Big time. Study a subject (like geology – lots of memorizing) a little bit each day. By the time finals rolled around? With just a few minutes of study, I’d be ready to take the final, and do so on a full night’s sleep.
However, while study may payoff later, not studying always pays off now. Present Me can have a beer, go to a movie, read a book, watch an episode of Twilight Zone®. These are all better than studying geology. Honestly, a dentist visit is more fun than studying geology, though it’s still probably easier to sleep through geology.
What has all of this got to do with Wealth? It’s Wilder Wealthy Wednesday, so how does all of this tie in?
I’m glad I asked.
Everyone makes choices about how they spend their resources. There are the needs of the Present, and those of the Future. Example: if retirement and putting The Boy and Pugsley through college weren’t issues? I would own a tank. You can buy them, you know. (LINK) Real tanks, sold by Eastern European arms merchants. It sounds like Bruce Willis should be in this movie, right? Oh, and I’d also own a swimming pool filled with Pez® that I would swim in like Scrooge McDuck™.
But I won’t. I value Future Me enough to forego the fun of riding around the neighborhood in a fully functional WWII Soviet tank.
Barely.
And it’s mainly so The Boy and Pugsley can get jobs and not have to live in my basement and borrow my tank. Future Me likes that Future.
This is also the way borrowing money works. Present Me decides he wants something, like a house. Present Me obligates Future Me for thirty years’ worth of mortgage payments. Good deal. Let’s pretend I don’t have the cash to buy what I want.
If that’s the case, I find someone who has cash, and trusts me enough that I’ll pay ‘em for the next thirty years. For their trouble, they get, say 5%, of the unpaid balance each month as rent on their money. They like that deal because they’ll have more money when it’s all done. I like the deal, because I get the house now.
An economist would call the interest rate charged to me for borrowing the money a “discount” rate. It’s the amount that the bank charges you so that they have a durable long-term investment that makes sense for them. If you can’t afford to meet their discount rate? The bank is required by Federal law to invest their reserves in Russian tanks and Pez®.
The discount rate in most cases is simply a numerical rating of your will power. If you knew I was going to give you fifty dollars at the end of the month, how much would you give up to get it today? Of you said, oh, five dollars, that means you are willing to give up 10% of the value . . . for one month. That’s (we can quibble about this number, but we won’t for now) a huge premium, the equivalent of 314% annual interest. If I could get a 10% monthly return, I’d retire . . . this afternoon.
So, our “discount” rate is really a numerical measure of our ability, our willpower, in delaying gratification.
Delayed gratification, it turns out, is a pretty significant human characteristic.
In the 1970’s, Stanford was known for several radical psychological experiments:
- The Stanford Prison Experiment – A really creepy experiment where students dressed as guards and inmates and completely cost me my faith in Californians.
- The Stanford Pizza Experiment – I think this was a 1970’s B-Movie. Adrienne Barbeau – don’t miss it!
- The Stanford Marshmallow Experiment – The one that goes with this post.
In the Stanford Marshmallow Experiment (SME), young children were given a marshmallow. They could eat it now, or be given two marshmallows later. I’m obviously simplifying this – they used cookies, too.
About a third of the children made it long enough to get the second treat. Between this and a previous experiment, there were several primary correlations on just which kids would get the second treat.
- The older kids were more likely to get the second marshmallow.
- Intact family. If there was a dad in the house? No dads around? No second treat.
So what? A lot, actually:
The longer a child could wait, the:
- Better the expected SAT score,
- More education the child would likely complete, and
- The child would likely be skinnier.
Those are pretty positive, and pretty significant outcomes. And, although there has been complaint about the study (small sample size, flawed methodology) since it matches my biases, I’ll assume it’s right. (Hint: this is how some journalists actually think, or rather, avoid thinking.)
Are there other examples of discount rates/willpower out there? Sure. We keep creating academics, and they have to look busy, so they keep writing papers for each other. Thankfully Jesse Shapiro wrote one (LINK) just to prove a point in my blog. Thanks, Jesse!
Shapiro looked at food stamp recipients. He found that there was a 10% to 15% drop in calorie consumption from the start of the month when the EBT card was filled up to the end of the month. Some people ate enough at the beginning that they had to skip meals at the end. Additionally, it looked like the food that folks ate through the month also was . . . not as good. The overall quality of the food consumed appeared to have dropped during the month as well. Might there be other contributing factors to this? Sure, but the data didn’t seem to indicate that was the case. And that 10-15% discount rate is huge. Over 300% annually (compounded).
So, why should you delay gratification?
- When it’s clear that it’s good for you.
- When there’s certainty to the payoff.
- When the payoff is big enough to make Current You value it almost as much as Future You.
Most of the time we have enough real information to know if it’s good or not and how certain it is. It’s that last bullet point: making Current You care enough. Why do people smoke? Their Current You runs a big discount rate on the first two factors. And maybe Future You just pisses Present You off?
One last thought on willpower. Remember that study that showed intact families mattered? Yeah. If the Mom is impulsive enough to get preggers by a man she can’t have around, or if the man is impulsive enough to bolt?
Bad news for those kids. Willpower and the ability to delay gratification is, like intelligence, highly inheritable. Looks like it’s late nights and No-Doze® for the lot of them.
