A Bird in the Hand is Worth Two in the Bush

Topic: Wealth Planning

Nicole (Weiss) Louthe 

July 6, 2017

Image used with permission: iStock/kalimf


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A Bird in the Hand is Worth Two in the Bush

Millions of years ago the survival of our ancestors depended on getting their hands on the first bird. Today there is no shortage of birds to feast on (Swiss Chalet anyone?), but our primal urges still drive our behaviour.

In the famous Marshmallow experiment conducted at Stanford University, a child was offered a choice between one marshmallow, which they could have at any time, or two marshmallows if they waited for 15 minutes alone in a room. Of over 600 children who took part in the experiment, only one third waited long enough for the second marshmallow.

It pays in the long-term to suppress our primal urges. In follow-up studies ten to fifteen years later, researchers observed that a large gap had opened between those who had resisted temptation and those who had not. They found that children who exerted self-control and waited for the second marshmallow had better life outcomes. As adults, they were less likely to take drugs and scored substantially higher on tests of intelligence and cognitive abilities.

It is difficult to overcome the preference of a small reward today to a bigger reward tomorrow. In another study, when given a choice between $10 today or $11 tomorrow, most people chose $10 today. However, when researchers gave a similar choice between $10 one year from now and $11 if they waited an extra day, most people committed to waiting an extra day for a higher payout.1

This visual illustrates the two choices put forward by the researchers.2

Why do we reverse our preference when the time frame is changed? Just like the children in the Marshmallow study we prefer smaller rewards that occur sooner over larger, later ones. However, when the same choice is given one year from now, we believe our future self will be more rational and choose the bigger reward. This tendency to make inconsistent choices over time has direct implications to financial planning.

Our tendency to consume now and pass the burden of making the right choice to our future self can lead to undesired life outcomes. If we spend today and leave the saving for tomorrow, retirement can arrive too quickly and we can be left unprepared. It’s important to strike the right balance between spending and saving today, so we are fair to both our present and future selves.

Unlike our ancestors, we live in a more complex world and our success depends on careful planning and building our nest egg over a long period of time. We need to find ways to suppress our primal urges and be aware of our tendency to make inconsistent choices over time. At Nexus, with the help of financial planning tools we can work with you to figure out how much you need to set aside for your future self, to help bridge your present needs with the future.

Looking for more on behavioural biases? Read our blog Beating the Bias: Tips to Avoid the Planning Fallacy!

1 2 What’s Going On in Your Brain, Michael J. Mauboussin and Dan Callahan, CFA.

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