22 Feb Marshmallows and Dividends – Do They Have More in Common than We Know?
In 1970, psychologist Walter Mischel from Stanford University put together a group of young children to conduct a series of experiments. Individually, the kids, aged 4 and up were led into a room and given a marshmallow (or an Oreo cookie or a pretzel, a treat of their own choosing).
They were told that they would be left alone for a while and that they could eat the marshmallow any time they wanted. Alternatively, they could wait till the experimenter returned in 15 minutes or even ring a bell to hasten the experimenter’s return.
If the child had waited out his or her time without eating the marshmallow or ringing the bell, they would be rewarded with another marshmallow. More than 600 kids were put through the process. Unknown to them, as they waited purposefully in the room stripped bare of all distractions, all their actions were being observed and recorded by the experimenters.
A small proportion of the kids ate their marshmallow immediately without any attempt to sustain their urges. #likeaboss.
The majority though, recognised that two marshmallows are better than one. They tried in one way or another to prevent themselves from gobbling up the tempting treat right in front of them. In Mischel’s own words, they would
Cover their eyes with their hands or turn around so that they cannot see the tray. Others started kicking the desk or tugging at their pigtails or stroke the marshmallow as if it was a tiny stuffed animal.
Of course, not everyone succeeded. Only a third of our little friends made it to the end and they were suitably rewarded with two marshmallows. The rest fell by the wayside and gave up at some stage in time. Despite all their efforts and the agony they ended up with nothing more than the original treat.
Delayed Gratification is the ability to resist the temptation for an immediate reward and to wait for a later one, often with the expectation that the delayed reward would be larger and more substantial.
This tricky little set up was meant for Mischel to study the phenomenon of Delayed Gratification. He had initially wanted to find out what are the factors that contributed to children successfully delaying their rewards.
Would older or younger children be more susceptible to temptation? Perhaps they might choose different ways to distract themselves? Or maybe it has got to do with how they perceive the marshmallow, focusing on its colour instead of its taste.
Very interestingly, the experiment grew largely beyond its original scope. What happened was, by putting so many kids through the marshmallow test, the experimenters obtained a dataset of kids and their level of self control.
Tracking the original kids
It grew into one of the largest longitudinal psychological studies of all time. As psychologists track the progress of these kids over their lifetimes, they discovered that there are clear and present relationships in many aspects.
In a 1988 follow up study by Mischel, kids who initially exercised higher self control were rated by parents as being more academically and socially competent, verbally fluent, rational, attentive, planful and able to deal with frustration and stress.
Additionally, kids at four years old who were willing and able to delay gratification achieved higher scores on their university entrance examination, the Scholarship Aptitude Test (SAT). They also reported lower levels of obesity and drug abuse.
In other words, as the kids grew into adults, those with better self control tendencies turned out ‘better’ in almost every possible way.
In our daily adult lives, all that seems true and intuitive. The ability to control our urges bodes well for our waistline (when the dessert menu is passed around), our wallets (when the signs scream sale!), our academic results (we study, instead of mindless surfing facebook or youtube). There is little doubt that delaying gratification is one awesome life skill to possess.
Dividend – shall we grab the marshmallow?
Which got me thinking about the role of dividend.
Everyone loves receiving dividends. I have not come across anyone who does not.
Like your monthly paycheck, it is positive reinforcement to see money being banked into your account. It is the clearest indication yet in the highly uncertain financial markets that you are doing something right with your investment.
Beyond that, the allure of building up an equity portfolio whereby dividend payouts provide a totally passive income cannot be understated. Come on, who does not want to live off dividend payouts? Who does not aspire to have dividends pay for your mortgage, or insurance policies or holidays, or daily living expenses? For sure I do.
And precisely of their unwavering appeal, dividend is beginning to seem strikingly like the proverbial marshmallow sitting on the table waiting for us to grab and gobble.
How heavily should the role of dividend play in the process of stock selection and portfolio building? Can a stock portfolio built on the basis of dividend be just as sound? Or is dividend yet another red herring in our already complicated stock selection process?
If we totally ignore potential dividends while picking stocks, would the potential returns be higher eventually? Would we have fared better had we sat on our hands, ignore the marshmallow, Delay our Gratification and wait for the experimenter’s return?
Post Script. Companies give out dividends for a variety of reasons. Some of them have a clear dividend policy. Others tend to be a lot more discretionary. Those in the growth stage tend to retain earnings to fund expansion while companies in the matured stage tend to have stable earnings and hence are better candidates for regular dividend payouts. REITS are mandated to distribute 90% of their earnings as dividends.