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What stops us from achieving our financial goals? What are the reasons for the constant setbacks in our investment journey?
We cannot find these reasons if we look at Everything from a narrow perspective of profit and loss.
Many factors contribute to the setbacks in our investment journey. Some of them are external factors like the ones where we don’t invest in the right place at the right time. These can be easily identified by ourselves. But some factors are hard to find out.
What are they? Psychological Factors!
Today we are going to delve into one such Psychological hurdle that stops us from being a successful investor!
Table of Contents
1.) Do You Know the Marshmallow Experiment?
2.) Power of Delayed Gratification
3.) Instant Gratification – A Middle-Class Trap
4.) Instant Gratification Vs Delayed Gratification
5.) The Price of Instant Gratification
6.) Instant Home Buying Dream
7.) The Secret To Contentment
8.) Conclusion
1.) Do You Know the Marshmallow Experiment?
In the late 1960s, a Stanford professor named Walter Mischel conducted an important psychological study. Mischel and his colleagues examined hundreds of children throughout their research and the majority of them were between the ages of 4 and 5.
Each child was taken into a separate room, seated in a chair, and placed a marshmallow in front of them. The child was now presented with a deal by the researcher.
The researcher informed that he was going to leave the room, but that they would receive a second marshmallow as compensation if they refrained from eating it during his absence. However, the child would not receive a second marshmallow if they chose to finish the first before the researcher returned.
It was therefore a straightforward decision: one treat now or two treats later.
For fifteen minutes, the researcher was not in the room.
As soon as the researcher closed the door, several children leaped up and devoured the first marshmallow. Others attempted not to give in to temptation, but after giving in a few minutes, they scooted, bounced, and wiggled in their chairs. Finally, only a few of the kids managed to wait the whole time.
This well-known study was published in 1972 and went by the name “The Marshmallow Experiment”. But only years later, the more intriguing part started.
2.) Power of Delayed Gratification
The researchers followed the lives of these children for more than 40 years. Children who delayed their gratification and waited for a second marshmallow had better health, mental health, and wealth 40 years later.
The research concluded that not falling for instant gratification, but pursuing slow gratification is an important step toward success in life.
We should understand that we cannot determine the whole human behavior based on a single experiment. It is much more deep and complex than that. But what we can learn from this experiment is that the children were ‘Promised’ that they would get an extra marshmallow if they waited. It is not ‘you may get’ or ‘you might not’. But, “You will get it if you wait!”.
There are not many scenarios in life when you can predict what’s gonna happen. But if it is obvious that there is something much better if we decide to wait. Then it is a no-brainer that we should “just wait”! But, what stops us from waiting?
Lack of discipline! We are so focused on the instant hit of dopamine that we get from instant gratification and forget the much better alternative that is close to us
3.) Instant Gratification – A Middle-Class Trap
The business world is trying hard to lure the middle class into the illusion of ‘instant gratification’. Let us look at some of the schemes that look great from the outside.
a) ‘Buy Now Pay Later’
With buy-now-pay-later (BNPL) loans, you can make purchases right away and pay them off interest-free over time. But, think about the costs involved and the penalties you might incur if you can’t afford the payments. The ability to easily overextend your money is one of the main risks associated with using BNPL services.
It could be challenging to register the entire cost of the item if you only consider the cost of each payment. Bills can pile up and be difficult to manage, particularly if you make many purchases with buy now, pay later plans.
b) No-cost EMI
No-cost EMI is an interest-free payment plan that allows you to break up the cost of a good or service into affordable monthly installments. However, free EMI plans have the potential to encourage people to overspend and buy things that are beyond their long-term means.
c) Same-day delivery
This is the new trend among many companies today. Same-day delivery is costlier than standard delivery. Even though there are advantages to this method for buying some essential products, same-day delivery pushes us into buying products that are not necessary. For example, you would have ordered a product in same-day delivery that you think is unnecessary later, but you are now stuck into buying a product with an extra delivery fee that you don’t require before even thinking of canceling it!
All the above business tactics are tools to trap middle-class people in the trap of ‘instant gratification’ and remember that when you buy things on EMI, the mortgage is your future
4.) Instant Gratification Vs Delayed Gratification
Many times our mind is tempted to buy things that we don’t need. Impulsive buying products are left lying around at home without any use. This is how they buy a treadmill in many homes. It is not used properly, often it is used to dry clothes.
What do we forget when buying things for instant gratification?
- We don’t check prices in different places when we buy things in a rush.
- We don’t bargain.
- We don’t check the warranty Period.
We are careless in many things and regret it later. You will not get the exact discount if you buy immediately. You may also incur some indirect charges. Such indirect charges are higher in credit card EMI.
The main reason for such wastage of money is ‘immediate gratification weakness’. A little delay in buying such items will automatically reduce the impulse. The mind will realize that it is not needed now.
But before that impulse subsides, we must not fall into the trap that the business world lays out to make us buy. If we make a policy of delaying the purchase of any product for at least a week and live by it under any circumstances, we will not fall prey and
get caught in the nets of the commercial world.
5.) The Price of Instant Gratification
Today it is becoming a habit for one to buy an expensive iPhone with his first monthly salary. An important reason for this is the drive for instant gratification.
Spending ₹75,000 and buying an iPhone is considered a mark of prestige. Instead, he can spend that ₹ 75,000 on a good online course to upskill himself for his job.
Or you can invest the amount in an equity mutual fund for the long term. An investment of ₹75,000 would have grown to ₹ 2.32 lakh in 10 years, ₹ 7.23 lakh in 20 years, and ₹ 22.46 lakh in 30 years if an investment of ₹ 75,000 earned an average return of 12% per annum.
This is the difference between instant gratification and delayed gratification. Instant gratification is comfort today and burden tomorrow. Delayed Gratification is a burden today and a comfort tomorrow. Delayed Gratification is a comfortable burden that everyone should willingly accept.
6.) Instant Home Buying Dream
The first financial goal of the middle class is to “own a home”. They are in a hurry to buy their own house as soon as possible because buying their own house will increase their social status.
When buying a house with a bank loan, they fake the feeling that they have moved from a rented house to their own house. But in reality, they have come from a rented house to a loaned house.
When you buy a home loan within a few years of starting to earn, the next 10 years are bogged down in repaying the home loan. Money cannot be added to any other investment. So it is not possible to enjoy the benefit of the compounding effect.
Many people do not keep the amount required for the 15%-20% down payment when buying a house through a home loan, but buy it as a personal loan. 80%-85% take home loan.
As soon as the house is completed, there will be a personal loan again for interior decoration. Most probably we will be in a position to take a jewelry loan for the cost of the housewarming ceremony.
Before taking a loan, you work for the financial growth of your family. Remember that after taking a loan you are working for the financial growth of the banks. So you can try to fulfill your dream of buying a house by keeping at least a 50% down payment in hand without being in a hurry to buy a house.
If you rush for instant gratification when it comes to buying a home, you may find yourself stuck in an irretrievable trap by taking on loan after loan. So it is wise to be patient and follow ‘Delayed Gratification’ while buying a home.
7.) The Secret To Contentment
“Making great investments requires a lot of delayed gratification.”
Charlie Munger
In today’s environment, even young people expect that it would be good if a passive income comes immediately from the investment they make. This is because they don’t realize what kind of negative effects, these expectations can have on their portfolio.
For example, someone has ₹10 lakh. If you want to invest it for passive income for instant gratification, you will have to invest in bank FD-type schemes.
If he invests ₹10 lahks in FD he will get Rs 5833 per month earning 7% annual return.
In 10 years, he would have got ₹7 lakh only as interest. Since the investment was made for immediate gratification, the entire interest would have been spent. All that is left in his hands is the capital of ₹10 lakhs.
Avoiding the immediate gratification of passive income, he can invest ₹10 lakh in an equity fund for the long term. In 10 years that investment will grow to ₹31 lakh at 12% p.a. growth.
Thus, it is better for those who earn a monthly salary or monthly income through business to invest their investment for immediate satisfaction called passive income, and not spoil the development.
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“தூங்குக தூங்கிச் செயற்பால; தூங்கற்க
தூங்காது செய்யும் வினை.”
“Slumber when sleepy work’s in hand, beware Thou slumber not when action calls for sleepless care.”
This is a ‘Thirukural’ from the famous Tamil poet and philosopher Thiruvalluvar. It means, “Sleepover such (actions) as may be slept over; (but) never over such as may not be slept over”. What it emphasizes is that you can take your time to do things that are not so important but don’t procrastinate doing things that need to be done quickly.
How can we apply this to our finances?
Impulsive buying that gives instant gratification, borrowing more to build a house with less cash, and passive income from investments should be delayed.
Things like reading investment books, starting an SIP on your first salary, and starting to save for retirement early should be done immediately rather than prematurely.
8.) Conclusion
We don’t have the power to control the outcomes of our investment decisions but we always have the power to avoid decisions that are certain to impact our finances negatively.
Instant gratification is one such huge blunder that impacts our finances negatively. Social media sites like Quora, Facebook, Twitter, etc will do their best to make us give in to this temptation. You should understand that the decisions that you make regarding your finances will not just affect you but also the people dependent on you financially.
We hope that this article provides you with enough strength to ditch instant gratification and move towards achieving your financial goals!
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