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


Print & Share

Print

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.

More Like This...

See another CRM2 blog post that may be of interest to you.

CRM2: The Nexus Approach to our CRM2 Reports

Topic:
CRM2
Excerpt:
With changing securities regulations coming into effect, investment firms are now required to provide individual investors with specific additional in

More Like This...

See another Foundations & Endowments blog post that may be of interest to you.

Charitable Giving Made Easier

Topic:
Foundations & Endowments
Excerpt:
Giving to charities and supporting our community are important to us at Nexus. We donate a portion of our management fees back to the charities and

More Like This...

See another Human Interest blog post that may be of interest to you.

The Case for Openness – An Open and Shut Case?

Topic:
Human Interest
Excerpt:
From time immemorial, mankind has been open. Open to new ideas, open to trade, and open to migration – the three critical ingredients for progress.

More Like This...

See another Inside Nexus blog post that may be of interest to you.

Welcome Aboard: Investing in Our Team

Topic:
Inside Nexus
Excerpt:
Nexus recently welcomed Harsh Narsinghani, Vice President & Portfolio Manager, as the newest member of the investment team. His arrival is the latest

More Like This...

See another Investments blog post that may be of interest to you.

Don’t Worry, Be Happy

Topic:
Investments
Excerpt:
A recent article by David Brooks in The Atlantic magazine argues that, despite the heavy shroud of pessimism that envelopes most of our current

More Like This...

See another Pearls of Wisdom blog post that may be of interest to you.

“Work, Work, Work, Work, Work, Work”

Topic:
Pearls of Wisdom
Excerpt:
This has been a busy year. I’ve had lots happening on the home front (a wedding!) and lots going on at the office (too long to list!) Managing work

More Like This...

See another Tax Planning blog post that may be of interest to you.

Saving in my Professional Corporation – It’s a Great Idea!

Topic:
Tax Planning
Excerpt:
The ability for professionals in Canada to incorporate their practice has existed for some time. Doctors, dentists, lawyers, accountants, and other

More Like This...

See another Wealth Planning blog post that may be of interest to you.

Dentists Get Their Financial Check-Up: Nexus attends the 2022 Ontario Dental Conference

Topic:
Wealth Planning
Excerpt:
In early May, we had the opportunity to attend the Ontario Dental Association’s (ODA) Annual Spring Meeting (ASM) in Toronto. Now in its 157th year,

On a Side Note…

See another CRM2 Nexus Notes Quarterly article that may be of interest to you.

No posts found.

On a Side Note…

See another Foundations & Endowments Nexus Notes Quarterly article that may be of interest to you.

Charitable Giving Made Easier

Topic:
Foundations & Endowments
Excerpt:
Giving to charities and supporting our community are important to us at Nexus. We donate a portion of our management fees back to the charities and

On a Side Note…

See another Human Interest Nexus Notes Quarterly article that may be of interest to you.

The Case for Openness – An Open and Shut Case?

Topic:
Human Interest
Excerpt:
From time immemorial, mankind has been open. Open to new ideas, open to trade, and open to migration – the three critical ingredients for progress.

On a Side Note…

See another Inside Nexus Nexus Notes Quarterly article that may be of interest to you.

Here we Grow Again!

Topic:
Inside Nexus
Excerpt:
Recently, the Nexus team welcomed our seventh new face to join us since the start of the pandemic in 2020. As growth is an integral part of our

On a Side Note…

See another Investments Nexus Notes Quarterly article that may be of interest to you.

Don’t Worry, Be Happy

Topic:
Investments
Excerpt:
A recent article by David Brooks in The Atlantic magazine argues that, despite the heavy shroud of pessimism that envelopes most of our current

On a Side Note…

See another Pearls of Wisdom Nexus Notes Quarterly article that may be of interest to you.

A Table for None, Please; Working From Home on the Rise

Topic:
Pearls of Wisdom
Excerpt:
Reading is one of the principal occupations in our profession. As we digest a wide range of material, interesting ideas and surprising facts – some

On a Side Note…

See another Tax Planning Nexus Notes Quarterly article that may be of interest to you.

Saving in my Professional Corporation – It’s a Great Idea!

Topic:
Tax Planning
Excerpt:
The ability for professionals in Canada to incorporate their practice has existed for some time. Doctors, dentists, lawyers, accountants, and other

On a Side Note…

See another Wealth Planning Nexus Notes Quarterly article that may be of interest to you.

From The Editor: What’s My Age Again?

Topic:
Wealth Planning, Living to 100
Excerpt:
How old are you? It’s a simple question, one we readily know the answer to, although some of us might not want to talk about it. And why do we know