A Bird in the Hand is Worth Two in the Bush

Topic: Wealth Planning

Nicole Weiss 

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.

No posts found.

More Like This...

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

That Giving Feeling

Topic:
Foundations & Endowments, Tax Planning
Excerpt:
Summer is now a distant memory. In fact, a radio announcer declared only 77 days until Christmas. Ugh. It is usually in the last quarter of the year

More Like This...

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

COVID: An Uneven – and Unequal – Recovery

Topic:
Human Interest
Excerpt:
Canadians have had enough of the lockdown. Here we are 18 months after you first heard of the then mysterious Wuhan flu. Today, but for any curve ball

More Like This...

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

The Nexus IT Crowd

Topic:
Inside Nexus
Excerpt:
We are happy to announce Ian Ligertwood as the newest member of our team. As Vice President, Operations & Technology, Ian will be responsible for

More Like This...

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

The Future of Money: a Digital Currency Primer

Topic:
Investments
Excerpt:
As a bottom-up investment management firm, we spend a lot of time looking at specific companies. But keeping an eye on evolving industry trends can be

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.

The Great Transition – A Tax Efficient Withdrawal Strategy

Topic:
Tax Planning
Excerpt:
The change from “saver” to “spender” is what I call the great retirement transition. Figuring out how to draw on your retirement savings to meet your

More Like This...

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

Living to 100… Is 100 the New 80?

Topic:
Wealth Planning
Excerpt:
It’s a common saying that there are two certainties in life, death and taxes. While we have a pretty good idea when we get taxed, which feels like all

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.

No posts found.

On a Side Note…

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

COVID: An Uneven – and Unequal – Recovery

Topic:
Human Interest
Excerpt:
Canadians have had enough of the lockdown. Here we are 18 months after you first heard of the then mysterious Wuhan flu. Today, but for any curve ball

On a Side Note…

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

The Nexus IT Crowd

Topic:
Inside Nexus
Excerpt:
We are happy to announce Ian Ligertwood as the newest member of our team. As Vice President, Operations & Technology, Ian will be responsible for

On a Side Note…

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

The Future of Money: a Digital Currency Primer

Topic:
Investments
Excerpt:
As a bottom-up investment management firm, we spend a lot of time looking at specific companies. But keeping an eye on evolving industry trends can be

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.

The Great Transition – A Tax Efficient Withdrawal Strategy

Topic:
Tax Planning
Excerpt:
The change from “saver” to “spender” is what I call the great retirement transition. Figuring out how to draw on your retirement savings to meet your

On a Side Note…

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

Living to 100… Is 100 the New 80?

Topic:
Wealth Planning
Excerpt:
It’s a common saying that there are two certainties in life, death and taxes. While we have a pretty good idea when we get taxed, which feels like all