Can a Marshmallow Predict Your Long-Term Trading Success?

Can a Marshmallow Predict Your Long-Term Trading Success?

Can a Marshmallow Predict Your Long-Term Trading Success?

Sixty years ago, Dr. Walter Mischel, a leading psychologist and former Stanford University professor, performed a simple, but enlightening experiment. The experiment involved a marshmallow, a child, and a slice of 15 minutes of time.

Dr. Mischel tested 600 children between the ages of four and six—all from Stanford University’s Bing Nursery School—and gave each of them a marshmallow in a private room.

Mischel informed the children they could eat the marshmallow now, or they could wait 15 minutes. If they chose to wait 15 minutes, they would be rewarded with a second marshmallow. Then Professor Mischel would leave the testing room, and a hidden video camera would record the children’s behavior.

Now… or later?

These two simple choices seem to follow us throughout life.

In the experiment, the children are confronted by two monumental problems simultaneously, temptation and gratification.  Fifteen minutes to a 4 year-old child is a very long time to deal with the problem of learning to control attention.

Today, in the age of instant “everything,” learning patience and delaying gratification seems to be a quality of a bygone era.  However, what Professor Mischel discovered was that selecting a longer-term time preference is one distinct quality that differentiates achievers from everyone else.  Dr. Mischel tracked his students for 25+ years and discovered that those subjects that chose to delay gratification in the experiment proved to be healthier, wealthier, and happier in life than those who chose immediate gratification.

Dr. Mischel’s study has often been criticized by those who think that he was trying to predict a person’s future based upon how they behaved during this marshmallow test when they were five years old. Instead, what Mischel proved was that we can all learn to make better choices. His contribution to behavioral psychology is something that appears to be common sense. You can get better results in life by learning to visualize better outcomes for a more fulfilling future.

The children that wanted the marshmallow “now” tended to gravitate toward shortcuts in everything they encountered.  However, the subjects that could exercise the discipline of waiting, and chose to delay their gratification, tended to be more optimistic about the future because they could envision a much larger reward down the line. It was exactly this ability to envision a better future that was the key driver to understanding what causes success.

Famed Scientist, Dr. Michio Kaku of the New School thinks that the Marshmallow Test highlights the concept of “time” and understanding the human condition extremely well.  “Humans are constantly dreaming, scheming and imagining about how to improve everything about how they exist in time,” says Kaku. “Intelligence is the ability of humans to map and envision the future based upon the choices they make now. It is this process of making good choices that creates better futures and fulfills our ongoing desire for more fulfilling “self-discovery” says Kaku.

The choice between instant or a delayed reward pits two sides within the brain against one another. On one side, is the “hot” limbic system, which drives impulsive behavior and urges us to enjoy the known reward now. The other side of the brain is the “cooler” prefrontal cortex, which oversees rational planning and logical problem solving, reasons and envisions that greater pleasure is worth the wait.

Mischel performed his study a decade before Futurist Alvin Toffler authored Future Shock.  The premise of Future Shock was that in the future change will happen faster and faster. This is interesting to contemplate because today we have been conditioned to witness instant everything. As Gordon Moore prophesied in 1965, the number of transistors per silicon computer chip has doubled every year allowing computing power and experience to accelerate exponentially.

Today, news and information travels around the globe in a frictionless manner. Many trading markets are commission-free and open 24 hours a day. Meanwhile, high volatility is very commonplace, as change moves faster and faster, it becomes harder to fathom a long term perspective.

So, what can we learn from the Marshmallow Test about how we manage our money?

The idea of delaying gratification is something that affects the greatest traders and money managers.  Most investors are familiar with Warren Buffett and his partner Charlie Munger at Berkshire Hathaway.  Buffett founded Berkshire Hathaway in 1965 and it started trading for $19 a share. Today it trades upwards of $345,000 per share. While this is notable and has made Buffett a legend and household name what most people don’t know was that 46 years ago there was a third partner, Rick Guerin. During the 1973-1974 recession and bear market the stock market had retraced over 60%. Guerin was highly leveraged in his investments with margin loans.  During the 1974 market bottom, Guerin sold his Berkshire Hathaway stock to Buffett for $40 a share and exited the partnership. Buffett comments, “Rick Guerin was just as smart as Charlie and I. But he was in a hurry.”

Think of how much Rick Guerin lost when he sold his Berkshire Hathaway shares at $40 in 1974,  when today they are trading at $345,000. A mere 1,000 shares of Berkshire Hathaway stock today is worth $345 million. Ouch!

Here’s a favorite Warren Buffet quote:

“The stock market is a device for transferring money from the impatient to the patient.”

Greed and fear are an endless source of suffering for investors and traders. They can easily control a perspective if you fall prey to their temptations. Everyone wants more of a prize “now” for doing less.

However, the Marshmallow Test can offer traders an understanding of how important discipline is to success. All traders will face temptation which may present itself in terms of being over leveraged, and over-trading. The skill of great trading is learning what to avoid and what to focus on so that success becomes possible.

Trading, like the Marshmallow Test, is an adrenalin rush. There are over 9000 listed stocks and options on which a trader can find a never-ending source of attention-grabbing temptations.   Short term pleasures can be found everywhere. Abandoning a proven trading plan in exchange for cultivating your instincts is a common refrain even among the most experienced of traders.  There is always a constant temptation to trade.

Patience is the one skill that all traders must master. As Jeff Immelt said, “Every job looks easy when you’re not the one doing it.”

Today everyone has access to high-speed internet, discount brokers and trading advisories that promise great riches. Stop and analyze the most successful traders and investors and you’ll find they made their fortunes by practicing patience and delaying gratification.  Success in their minds clearly stated is learning to strike the right market at the right time and waiting for that opportunity to present itself. Paul Tudor Jones, Peter Lynch, George Soros, Ed Seykota, John Templeton all differentiated themselves by having clarity on an objective/goal and building processes that allowed them to move towards its fulfillment.

In a world where everything is available at the blink of an eye, we are rarely taught how important patience is. It’s only when we understand its importance can we learn how to mitigate risk.  Looking at a trading screen can be a completely unproductive activity much like the way that a gambler eyes a slot machine and dreams of pulling the handle. As traders we must remind ourselves continuously, are we after excitement or profits?

Great trading can be quite boring.

Honestly, staying with a winning trade or winning strategy is often like watching paint dry.  It offers none of the adrenalin of trying to pick the exact high or low in the S&P 500 intraday.

This is why artificial intelligence is so valuable to traders today.  A.I. is constantly computing and crunching probabilities to determine the best move forward in the right asset at the right time.

There is only one fact in the world of markets and that is PRICE. What the price of a stock does is the only thing that matters to a trader. It’s the only thing that can create wealth. As experienced traders have learned, the market is never wrong, but opinions often are!

The job of A.I. is to find those stocks with the best trends, either Up or Down and highlight where the risk lies in that market.

Some traders bewilder themselves by trying to relate the top news stories to their trading decisions.

Do you think a human trader alone can effectively evaluate thousands of stocks, and determine which ones have the greatest statistical probability of success?

One day we’re up 1,000 points… one day we’re down 1,000 points.

The media blames anything and everything for stock movements, great storylines that will create enough content to fill up a 24-hour news cycle.

But don’t let what the talking heads are saying, create a temptation that forces you to abandon a great trade with a high probability of success; this is why A.I. is indispensable to traders today.

Here’s what Dr. Michio Kaku said about success:

“Intelligence is the ability of humans to map and envision the future based upon the choices they make now.”

Intrigued?

Visit with us and check out the A.I. at our Next Live Training.

Discover why artificial intelligence is the solution professional traders go-to for less risk, more rewards, and guaranteed peace of mind.

It’s not magic. It’s machine learning.

Make it count.

 

IMPORTANT NOTICE!

THERE IS SUBSTANTIAL RISK OF LOSS ASSOCIATED WITH TRADING. ONLY RISK CAPITAL SHOULD BE USED TO TRADE. TRADING STOCKS, FUTURES, OPTIONS, FOREX, AND ETFs IS NOT SUITABLE FOR EVERYONE.

DISCLAIMER: STOCKS, FUTURES, OPTIONS, ETFs AND CURRENCY TRADING ALL HAVE LARGE POTENTIAL REWARDS, BUT THEY ALSO HAVE LARGE POTENTIAL RISK. YOU MUST BE AWARE OF THE RISKS AND BE WILLING TO ACCEPT THEM IN ORDER TO INVEST IN THESE MARKETS. DON’T TRADE WITH MONEY YOU CAN’T AFFORD TO LOSE. THIS ARTICLE AND WEBSITE IS NEITHER A SOLICITATION NOR AN OFFER TO BUY/SELL FUTURES, OPTIONS, STOCKS, OR CURRENCIES. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE DISCUSSED ON THIS ARTICLE OR WEBSITE. THE PAST PERFORMANCE OF ANY TRADING SYSTEM OR METHODOLOGY IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. CFTC RULE 4.41 – HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.

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