The marshmallow test: why cryptocurrency investors should learn about delayed gratification
I am fascinated by the cryptocurrency market dynamics and the interactions of human behaviour that is a factor in creating such a passionate yet volatile space. This got me thinking about the possible reasons why the market behaves so frantically and as such in this article I will attempt to draw some parallels with the results of an interesting psychological experiment known as the 'marshmallow test' and why cryptocurrency investors should learn about delayed gratification.
Anyone who is invested in the cryptocurrency market will attest to the fact that it can be a roller coaster ride of emotions, especially if one is intently focused on the price action from one day to the next. If anyone is looking at the market over a short period of time it can be a stomach churning event, especially for those who are new to the space or have invested far more money than they really should have in the belief that it is a get rich quick scheme.
Of course the motivation for anyone making any type of investment is to try and make some money. In fact it is a well known fact that the cryptocurrency market produces some eye watering returns, far surpassing anything that traditional finance is able to offer. But given the fact that outsized returns are made, why is it that people are never content with what they make?
It could be easy to focus on human greed here, so lets try and dig a little deeper.
The cryptocurrency market is known to be extremely cyclical in nature and each cycle has historically been quite predictable. Each bull market cycle has coincided with the year or so after each Bitcoin halving event. So in some respects one can understand the fervent desire to make as much money as possible during this time period, however it still doesn't really explain the dynamics behind some of the behaviour as surely one should be happy to simply invest and hold something like Bitcoin that has achieved an annualised return over the past 10 years or so in excess of 200%.
The marshmallow test
I recall learning at school about a psychological study known as the 'marshmallow test' and I'd like to consider some parallels that could be drawn from that study and what goes on in the cryptocurrency market today.
Essentially the marshmallow test is one of the most well known studies of social-science. Put simply place a marshmallow in front of a child, tell them that they can have a second one if they can last a set amount of time (say 15 minutes) without eating the first one, and then leave the room. Whether they are patient enough to double the reward is supposed to indicate a level of willpower that will pay dividends further in life such as at school and eventually at work. By passing the test was initially thought by many to indicate a promising signal of future success in life.
But a further study that published its results in 2018 cast some doubt on that original concept. They conducted the classic marshmallow test again but this time they then went on to track how children went on to do later in life. The results suggested that delayed gratification had huge benefits, including on such measures as standardised-test scores.
The researchers used a much larger sample that was also more representative of the general population in terms of race, ethnicity, and parents’ education. The researchers also, when analyzing the test results, controlled for certain factors—such as the income of a child’s household—that might explain a child’s ability to delay gratification and their long-term success.
Ultimately, the study found limited support for the idea that being able to delay gratification leads to better outcomes. Instead, it suggests that the ability to hold out for a second marshmallow is shaped in a large part by a child’s social and economic background - and, in turn, that that background, not the ability to delay gratification, is what is behind kids’ long-term success.
In not being able to replicate the marshmallow test does more than just demystify the earlier notion; it suggests other possible explanations as to why poorer kids would be less motivated to wait for that second marshmallow. For them, daily life holds fewer guarantees: There might be food in the house today, but there might not be tomorrow, so there is a risk that comes with waiting. And even if their parents promise to buy more of a certain food, sometimes that promise gets broken out of financial necessity.
On the other hand, for those kids who come from more affluent households headed by parents who are better educated, it tends to be easier to delay gratification. This is borne out by the fact that from experience where the adults have the resources and financial stability to keep the house well stocked with food. And even if these children don’t necessarily delay gratification, they can trust that things will all work out in the end—that even if they don’t get the second marshmallow, they can probably count on their parents to take them out for ice cream instead.
Furthermore, the economist Sendhil Mullainathan and the behavioural scientist Eldar Shafir wrote a book in 2013, Scarcity: Why Having Too Little Means So Much, that provides an insight into how poverty can lead people to opt for short-term rather than long-term rewards; the state of not having enough can change the way people think about what’s available now. In other words, a second marshmallow seems irrelevant when a child has reason to believe that the first one might vanish.
Qualitative sociological research has also shown how teenagers growing up in poverty work long hours in poorly paid jobs to support themselves and their families. Yet, despite sometimes not being able to afford food, they still have a tendency to splurge their money on payday, buying unnecessary material things instead of saving it or using it to pay for the things that their families really need.
What's this got to do with crypto?
So, you're probably scratching your head asking 'what does this have to do with the cryptocurrency market?'
Well, lets consider the cryptocurrency market participants.
The cryptocurrency space is accessible to literally anyone; there are no barriers to entry meaning anyone from any background with any amount of money can get involved. This is unlike the traditional financial markets which are primarily accessible only to those who have the financial means necessary, namely the big financial institutions.
The fact that the cryptocurrency market has presented such an opportunity for anyone to participate in what can only be described as a technological revolution and massive wealth transfer is truly amazing, however lets go back to the study again as this dynamic in itself presents some challenges.
Consider new, inexperienced and sometimes easily lead cryptocurrency market participants in terms of the children in the study who come from poor households and then look at the experienced, financially literate, institutional market participants in terms of being those who come from more affluent households.
This analogy might go some way to demonstrate some of the behaviour in the cryptocurrency market.
The more experienced participants have money, they understand how markets function and as such they are comfortable to delay their gratification. If they only receive one marshmallow to them that is fine as they are financially stable and they have a detailed understanding as to how the market works and trust that in time it will reward them with a nice big ice cream so to speak.
Whereas those who are new to the space don't necessarily have the money or in depth knowledge of the market, so just like the poorer child who is not willing to hold out for the second marshmallow they take what they are given as there is the short term belief that what they have been given might be taken away.
Further when they achieve any success they are more inclined to spend the money on material items, whereas the more affluent children are probably more likely to either see the long term potential in a project and hold, reinvest profits into other projects with potential or accumulate more of the same coin instead of splurging any money that they have made.
Don't chase shiny objects and be tempted to jump from one hype coin to the next in the hope of chasing big gains.
Don't be that guy
So how can the 'poorer children' in the cryptocurrency market learn from the more 'affluent children' or modify their behaviour to ensure that they receive the second marshmallow?
Consider products that offer features such as being able to lock up your tokens in return for a reward, effectively ensuring a delayed gratification and saving you from not being able to receive the second marshmallow. Have a look at the Hex token and product as a great example of this.
Ensure that you do your own research and have complete belief in the coin or token that you are investing in.
Don't invest more than you can afford to lose.
If the investment is into an altcoin, unless you have complete faith in the long term prospects for the project never hold an amount that is more than a few percent of your overall portfolio.
Never get married to any coin. If there are doubts in the long term viability of a project, sell it before a crypto bear market begins.
Don't be afraid to take profits.
Zoom out; have a long term time horizon - anything less than a few years is effectively gambling - investing should be seen as a marathon and not a sprint.
Don't chase shiny objects and be tempted to jump from one hype coin to the next in the hope of chasing big gains