We Have Met The Enemy And He Is Us

Watch the kids in this video.  They are re-creating psychologist Walter Mischel’s famous 1972 marshmallow experiment, which was designed to study children’s ability to defer gratification.  In the actual experiment, the researchers analyzed how long each child resisted the temptation to eat a marshmallow placed in front of them in order to obtain a second marshmallow later and whether or not doing so was correlated with future success.


The kids’ struggles to hold out for the extra marshmallow is poignant and hits home with all of us. 

Over 600 children who took part in the original experiment. A small minority ate the marshmallow immediately. Of those who attempted to wait, less than one-third deferred gratification long enough to get the second marshmallow. The others struggled to resist temptation and held out for an average of less than three minutes. Any of us struggling to diet or just to eat right will surely relate. For most of us, a bird in the hand is better than two in the bush, no matter how likely we are to acquire the two later.

As it turned out, those children who waited and got the second marshmallow did better later in life.  A follow-up study in 1988 showed that “preschool children who delayed gratification longer in the self-imposed delay paradigm, were described more than 10 years later by their parents as adolescents who were significantly more competent.” A second follow-up study, in 1990, showed that the ability to delay gratification also correlated with higher SAT scores (over two hundred points higher, on average).

Obviously, the ability to delay gratification is an adult concern too.  Retirement planning may be our supreme test in this regard.  Adults are asked to put money aside for decades instead of spending it for (seemingly?) important or fun stuff now in order to fund an unknown, uncertain and often far-off future.  Not surprisingly, we aren’t very good at this hyperbolic discounting.

We who focus on retirement planning spend a lot of time and energy considering such things as asset allocation plans, decumulation strategies and needs analysis.  But we spend far too little time and energy on the most important factor of all — how much money is saved and how to save it. As my friend Wade Pfau succinctly points out in his seminal JFP paper, Safe Savings Rates: A New Approach to Retirement Planning over the Life Cycle, “[t]he focus of retirement planning should be on the savings rate rather than the withdrawal rate.” Put another way, “someone saving at her ‘safe savings rate’ will likely be able to finance her intended [retirement] expenditures regardless of her actual wealth accumulation and withdrawal rate.” Using Wade’s analysis, these “safe savings rates” generally range from 9.3 percent to 16.6 percent over 30 years under various sets of market conditions. Simply put, we should all be maxing-out out our defined contribution plans (usually a 401(k)) every year of our working lives and leaving the money untouched until retirement.

Unfortunately, few of us are able to delay gratification sufficiently to save at anything like those rates. The 2012 Retirement Confidence Survey from EBRI once again shows just how poorly we are doing.

  • One-third of workers haven’t saved at all for retirement (up from one-fourth in 2009).
  • Only 58 percent of workers are currently saving for retirement (down from 65 percent in 2009).
  • 60 percent of workers have less than $25,000 in savings and investments (30 percent have less than $1,000).
  • More than half of workers (56 percent) report they have not done a retirement needs calculation.
  • Workers dramatically underestimate how much money they will need for a comfortable retirement.
  • Only 17 percent of workers ae “very confident” of their ability to accumulate the savings needed for retirement.
For decades, psychologists focussed on raw intelligence as the most important variable when it comes to predicting success in life. But the marshmallow experiment shows that intelligence is largely at the mercy of self-control.  Even the smartest kids still need to do their homework. As a fifth grade teacher, my wife faces that conundrum every single day. 
But whether we’re talking about our kids or about retirement saving, what can we do about the I want to eat the marshmallow now problem?
Mischel’s conclusion was that the crucial skill is the “strategic allocation of attention.” Instead of getting obsessed with the marshmallow — the “hot stimulus” — the patient children distracted themselves by covering their eyes, pretending to play hide-and-seek underneath the desk, or singing songs from Sesame Street. Their desire wasn’t defeated — it was merely displaced. If you’re on a diet, don’t have potato chips in the house.

Mischel and his colleagues later taught children a simple set of mental tricks to deal with the problem, such as pretending that the candy is only a picture, surrounded by an imaginary frame. These techniques dramatically improved their self-control. The kids who hadn’t been able to wait sixty seconds could now wait fifteen minutes. “All I’ve done is given them some tips from their mental user manual,” Mischel said. “Once you realize that will power is just a matter of learning how to control your attention and thoughts, you can really begin to increase it.”

Penn psychologist Angela Lee Duckworth looked at the relationship between self-control and grade-point average among eighth graders who were given a choice between a dollar right away or two dollars the following week. She discovered that the ability to delay gratification was a far better predictor of academic performance than IQ. She said that her study shows that “intelligence is really important, but it’s still not as important as self-control.”

So if we’re talking about retirement planning, how to we avoid “thinking about the marshmallow” and thus save more? 
In response to many workers declining to enroll in their defined contribution plans and based upon the findings of behavioral finance (that many fewer people will opt-out than will choose not to opt-in — doing nothing is a crucial default, see here, for example), Congress enacted the Pension Protection Act of 2006 in part to permit employers automatically to enroll workers in 401(k) savings plans. Such workers then may choose to opt-out. Thus inertia works in favor of savings. Moreover, many of us don’t fret much about this type of withholding — out of sight, out of mind — making it easier for us to stick with it.  Employers might also consider higher default withholding percentages and using contribution matches (or better yet, increased contribution matches) as employee incentives and rewards to get even better results. 
Unfortunately, once we start spending at a given rate, it can be hard to reduce it.  Thus the idea that workers should just decide to contribute more isn’t all that realistic overall, even for those who understand the value of doing so (although I recommend increasing one’s contribution by 1 percent every six months — that shouldn’t be too hard for most people to stomach).  One technique for increasing contributions is to do so when one’s salary increases via a raise or a promotion.  If one gets a 4 percent raise, increasing one’s DC plan withholding by 2 percent would be a meaningful improvement to retirement planning while still providing the feeling of a raise since take-home pay would still increase.  The impact of even reltively minimal increased withholding can be dramatic.  For example, a worker who earns $50,000 per year with 4% annual raises, an employer match and an annual return on investments of 7%, by reducing his or her weekly paycheck by a mere $16 and appropriating that money to a 401(k) would set aside about $250,000 more for retirement over 30 years. Compound interest is a wonder.
Employers should also get serious about an Investment Policy Statement and a formal Investment Policy Committee. The goals should be (a) better (often fewer)investment options; and (b) better education among the Committee members then transmitted intentionally to the workforce as a whole.  A competent professional should be brought on-site regularly to provide education on company time.  Doing so will increase success, knowledge and participation and will meet the employer’s fiduciary obligation to boot. 
Other possible techniques relate simply to spending less while making and keeping to a budget. Some other suggestions from Dan Ariely (author of the best-selling Predictably Irrational, among others) are here.
Obviously, the case can be made (for example, here) that workers can do better outside their company DC plans, especially if their investment choices aren’t the best or are too expensive and if they don’t have Roth options.  However, if left to their own devices, how many workers will eat the marshmallow — in effect, sitting right in front of their eyes —  instead? 
As Dan Ariely told me recently, “we know that if we relied on our mediocre cognitive ability and thinking and demanded that every month we make this decision, the odds are we will never make this decision.  Or at least we’ll make it very infrequently.  So by creating a system that takes this decision out of our hands we actually do much better.”
“If you’re thinking about the marshmallow and how delicious it is, then you’re going to eat it,” Mischel says. “The key is to avoid thinking about it in the first place.” Indeed, “[i]f you can deal with hot emotions, then you can study for the SAT instead of watching television,” Mischel says. “And you can save more money for retirement. It’s not just about marshmallows.”

15 thoughts on “We Have Met The Enemy And He Is Us

  1. Bob, excellent analysis!

    This was one of the important themes discussed at the “Retirement Planning in the Age of Longevity” conference at Stanford. How to get people to focus on the long-term problem of retirement planning. Humans were not evolutionarily prepared for old age. It really is something brand new for humans. Nothing in human history that has us prepared to plan for the long term. Evolutionarily, humans were better off focusing on the present and not trying to plan for the future. And so people have a lot of trouble thinking about their future selves in old age. We need to establish and real and emotional connection to our future selves. Make that future person more than a stranger, and give that future self emotions with wants, needs, and drives… not just an abstraction. Some other ideas from the conference include:

    – Change the nature of the conversation to more positive: plan for a long life; focus less on frailty and aging
    – Since no one seems to save for retirement, people feel okay not thinking about it since it seems no one else is thinking about it anyway. It’s a social norm not to plan. That has got to change
    – Employees like gradual retirement and continuing part time work, but employers may not like that and may not want part timers. How can this change?
    – Framing the language. Example: cut your spending vs. simplify your life; don’t talk about eating catfood as it is just discouraging. Language must be more comforting
    – Why are people not planning: people think: I’ll just figure it out later, I’ve always been able to do that and will do it again in the future. False confidence.
    – When educating on planning, need an immediate actionable step. People can only engage for 7-10 minutes on this stressful topic, and if too much time is spent on a topic people will disengage and never follow through
    – Alcoholics Anonymous, Jenny Craig, WeightWatchers: understand how these organizations work with people’s denial and engage them and help them to make positive changes. Related, perhaps building peer support models is helpful and critical
    – Keep benefit structure exactly the same, but just reframe 70 as the full retirement age. That framing might have a big effect to delay retirement
    – Keep benefit structure exactly the same, but just reframe 70 as the full retirement age. That framing might have a big effect to delay retirement

  2. I made this same argument to my God daughter at her college graduation two weeks ago. “Put money in your 403 (b) regularly over 30 plus years and you’ll have a golden retirement.” This was my graduation present in the form of a letter. I offered to reimburse half of her first year contribution to the 403 (b). This was in lieu of an i-Pad or similar piece of equipment. I thought the amount I would reimburse her 403 (b) would exceed the cost of the i-Pad several fold and if she made the move to begin the benefit plan, she would be the winner. So far, she has acted like the vast majority of people faced with eating the marshmellow now vs. later and receiving another, She hasn’t thanked me nor has she moved in the direction of starting a retirement plan. Most people want to become “rich”, but somehow they think it happens by magic and most are unwilling to harness even small amounts of savings to benefit from compound investment returns over time. Is it any wonder we have so much class envy?

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  4. Let me start but apologizing if the tone of this comment reads too negatively, but the situation described by AM above is something of a regular issue in my family as well.

    I think the core of my problem with AM’s position is that often people making these types of ‘deals’ or ‘presents’ seem to be more often motivated out of something other than selfless giving. Let me explain.

    The point of this post (at least in part) by Bob was to talk about the ways in which our psychological disposition motivates suboptimal financial decision making. The jumping off point is the comparison of one marshmallow now (AM’s metaphorical iPad) experiment. The theory being that like AM’s God Daughter most people, when given the clear option, will choose to keep an extra $500 a month than write that check to their brokerage. Hence, solutions like opt-out witholdings or willpower improvement trainings.

    But AM did exactly the same thing as putting a marshmallow in front of a 6 year old, but worse AM doubled down on the problem. s/he said that rather than getting this shiny new iPad for her great accomplishment, the God Daughters present was to put away money this year. While I understand from AM’s perspective this ‘gift’ had the potential to be of alot more value, from the God Daughters perspective it was a bill. (not to mention a bill tied to someone she is emotionally invested in.)

    I don’t think giving a 22 year old advice about the power of saving for 30 years so you have a comfortable retirement is even a gift at all, its a class called finance. Its that house that gives out a handful of pennies on Halloween. And thats ok! everyone gives bad gifts and this God Daughter is certainly in the wrong for not seeing the good intentions, but this is hardly a problem of believing in magic to get rich. Its exactly the same problem this post is about, AM set up a delayed gratification experiment and the God Daughter failed. If anything (based on the success of these nonmarshmallow eaters) thats more evidence AM should try a different approach if s/he is so interested in ensuring the God Daughters retirement.

    For example, call up your accountant or investor and have them prepare everything on your God Daughters behalf (maybe something easy like a roth), set a level you will fund it at (regardless of her contributions) and just get it done. Out of sight out of mind for the God Daughter, and you effectively did what you wanted to do.

    Want your God Daughter to make smarter financial decisions, pay for some classes or advisers to talk with her. What could be a better financial gift than an open ended invitation to talk with your financial adviser anytime she wants about what SHE WANTS financially.

    This isn’t an excuse to for her to do nothing, but a sober evaluation of the situation she is in. Even if she is really worried about her retirement my guess is that as a 22 year old student she has alot more things to figure out about how to get there over the next 40+ years. Things like finding a career, family, or community to grow old with. How she will make her rent payments or if she will attend graduate school. AM didn’t give her the keys to his/her castle or open some secret door to the Skull&Bone society.

    As for AM’s comments on class envy I guess I just find it comical that some who values their wealth and security so highly would find it repulsive others could do the same. Again I am sorry for the tone, and nothing excuses thanklessness by the God Daughter, but she shouldn’t be exclusively to blame here, AM gave a gift that fed the instant gratification problem, not removed it.

  5. Ways to lessen the financial pain of saving, such as auto-enrolling employees in DC plans, seem to work to a point. But what is disheartening is the extent to which people view their DC plans as slush funds and the high rate at which they take loans from them:

    What ever happened to the principle of paying yourself first? But maybe that is easy for me to say because I never really liked marshmallows.

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