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Interest Rates and the Marshmallow Test

Saturday, October 15, 2016 7:42
% of readers think this story is Fact. Add your two cents. / Ronald-Peter Stöferle / Oct 14, 2016

The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.

~Thomas Sowell

The Marshmallow Test is probably the most famous experiment testing people’s patience, which is reflected in the concept of time preference in economics. Psychologist Walter Mischel tested the “delay of gratification” by offering a desired object — such as a Marshmallow — to a child. The examiner told the child that he was about to leave, and that the child would receive a second Marshmallow if it did not eat the first one before the examiner returned. The examiner returned after 15 minutes, but in most cases the temptation had proved too strong. In a variety of versions of the experiment, children’s waiting time amounted to approximately six to ten minutes (with wide dispersion in evidence).

“Originary” Interest Rates Stem from Human Desires 

Why is this experiment relevant to us? We obtain economic gratification if we rein in our impatience with respect to consumption. Interest is the most important gauge for this — it is essentially equivalent to the second marshmallow in the experiment. Interest is the return for time, the return for people who decide to wait although they would actually prefer to get everything immediately. Eugen Böhm-Bawerk recognized that interest is not the “price” of money. Rather, interest is the return for the exchange of “money available today against money available tomorrow.” One could also refer to it as the “price of impatience.”


The post Interest Rates and the Marshmallow Test appeared first on Silver For The People.


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