Does your trading pass the Marshmallow Test?

In the 70’s, Stanford professor Walter Mischel created a simple experiment…

…one that would determine not only future scholastic and financial success, but a healthier body mass index (BMI) to boot.

What he did was put a young child ages 4-5 into a room with an irresistible marshmallow placed in front of them.

An instructor would tell the wide-eyed youngsters that if they could wait 15 minutes before eating the fluffy snack, they would be rewarded with a second marshmallow.

A small amount of the kids would simply shove the treat into their pie hole, immediately failing the test.

Others would agonize over the marshmallow, and eventually succumb to its siren song of sugary delight.

About a third of the kids could hold out for 15 minutes, and were given the second marshmallow.

These children were followed throughout their life, and the results were stunning.

SAT scores of those that were able to delay gratification were 210 points higher than the kid that could only hold out for less than 30 seconds.

High SAT scores are absolutely correlated to income and wealth.

Those who make $200,000 a year have an average score of 1714 (out of 2400).

Those who make $20,000 a year have an average score of 1326.

The effect that the test uncovered is the ability to delay gratification.


Self-control, however, is like a muscle – you can only use so much per day.

That’s why even great traders can start making bonehead mistakes…the most common being taking profits too early…being unable to delay gratification.

When you have a sudden spike in volatility, you can feel frustrated and miserable.

Suddenly your willpower is gone.

You might have decided to buy the recent bottom when the Smart Money Indicator went to a buy signal Monday morning…but then you decided to sell already.

You couldn’t delay your gratification because your self-control muscle was wiped out.

If you’re still hanging on, then congratulations, you’re doing it right.

Most traders take small profits, and let their losers keep losing.

That’s a recipe for disaster.

So what’s the remedy?

For me, it’s using well-tested mechanical trading strategies and a bit of desensitization.

I only trade strategies with exact signals. There are no gray areas for the buying and selling.

With experience, I can take all the signals without fail because I’ve seen every rotten thing (just about) that can happen in the stock market.

It’s like watching all the Rambo movies back to back makes you less sensitive to violence, gore, and bad acting.

Now if you don't want to personally experience the hard-knocks of trading, you can be a student of the market.

You will see that sudden reversals are norm rather than the exception.

I tell you this entire story to make you more self-aware.

Know thyself.

As Confucius said, “Real knowledge is to know the extent of one's ignorance.”

In other words, if you understand your limitations as a trader – or anything in life for that matter – you have a much greater chance of overcoming whatever life throws at you.

By the way, here’s a video of the Marshmallow Test in action:

Trade smart,

Dan “Prince of Proof” Murphy