The Stanford Marshmallow Experiment

Great article I am re-posting here from the Wall Stree Journal Blog Archive....

The One Crucial Money Concept Children Need to Learn

ELEANOR BLAYNEY: You’ve probably heard about the Stanford marshmallow experiment.  Conducted in 1971, it involved approximately 600 four- to six-year-olds, who were individually brought into a room and seated in front of a single marshmallow.  Each child was then told by an adult that he or she had a choice:  Eat the marshmallow now, or wait until the adult returns and get two marshmallows. Whether or not you’re not familiar with this “delayed gratification” study, take two minutes to watch this clip.  It’s hilarious and adorable.

Financial experts often cite the marshmallow exercise as reinforcing the importance of saving for tomorrow rather than consuming today, as well as illustrating how compound interest works. It shows how one set-aside marshmallow begets even more marshmallows, a feat that according to Einstein deserves veneration as the 8th wonder of the world.  As such, it would seem to be a simple and tangible way to teach our children some of the basic principles of financial planning.

Except that I, as one such financial adviser, think that the lesson is slightly flawed by being too simplistic, even for a kindergartner.  I believe that the first money lessons for our children shouldn’t be of the “either/or” variety, but demonstrations of the power of “and.”

Children need to learn about the fungibility of money.  Fungibility–itself a delightfully squishy, marshmallowy term– is defined by Meriam-Webster as “being of such a nature that one part or quantity may be replaced by another equal part or quantity in the satisfaction of an obligation.” Hardly an easy concept for adults and preschoolers alike, so let’s go to its linguistic origins.  From the Latin word for “function,” the fungibility of money can be described as the multiple uses that money can serve.
In other words, money can be used simultaneously for more than one purpose: it can be spent, saved and given.  No one use has higher value than another. All are necessary, and each needs judicious management.  Children need to understand that money coming into the household, or given to them, should be allocated to meet the needs of today and tomorrow, as well the needs of those other than themselves.

A simple way to model this lesson for children is to have them divide money gifts or allowances into three jars.  These same three jars can be used to teach more sophisticated lessons as the child gets older: for example, budgeting certain percentages to each jar, depending on present needs, future goals and the priority placed on philanthropy.

As important as putting the money into the jars is taking it out. For example, making an occasion of taking the savings jar money to the bank, credit union or brokerage firm can teach important lessons about our financial system.  Having a child visit a chosen nonprofit with the contents of his giving jar makes the benefits of charitable giving immediate and memorable.

In today’s “paycheck-to-paycheck” lifestyle, it could be argued that the marshmallow lesson will have more impact on impressionable, media-manipulated children than the three jars.  But go back to YouTube and observe the palpable pain of those children as they resist the marshmallow.  I am not convinced that financial lessons need to be so agonizing.  Instead, I rather like watching the little girl who nibbles a bit of the marshmallow, and seems to make an important discovery about the benefits of balancing now and later.

Eleanor Blayney (@EleanorBlayney) is consumer advocate of the Certified Financial Planner Board of Standards.

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