The study of behavioural finance is spreading rapidly, and leading financial services providers like Barclays Wealth are making good use of psychology to better understand their customers’ needs and provide them with the services that they really need.

Some psychologists are busy researching what drives people to take certain decisions on their finances that may superficially seem very daring.

One book that attempts to answer this question is the Marshmallow Test published by Walter Mischel, a professor of psychology from the University of Columbia. Mischel started research over 50 years ago by studying the ability of hundreds of children to resist the urge for instant gratification in the hope of bigger rewards in the future.

The experiment was fairly simple: a child sits alone in a room, staring at a plate piled with delicious-looking marshmallows. The girl has been told that she has two options: eat one now, or wait 15 minutes and have two marshmallows. Mischel’s experi-ment found that about 25 per cent of children resisted grabbing the treat.

But what is more interesting are the developments that Mischel discovered in the last few decades since he started his experiment. Looking in later life at the children he had recorded in the early 1960s as well as new groups of teenagers, Mischel found that those who passed the test were more likely to do well academically and socially than those who did not.

Put simply, those who are better at self-control as children are more successful in their careers, less likely to live unhealthy lives and often more successful in the management of their finances. What interests me most is the great differences in attitudes one notices in those who manage their finances for the present and the future.

According to Mischel, “self-control also feeds into the ability to save and manage money, to control the gambling instinct and to persist with a rational moneymaking strategy in the face of adverse conditions”. This basic truth could have a profound effect on how the financial services industry attempts to serve its customers.

The culture of savings even in our society is becoming increasingly unpopular

Digital technology has made it that much easier to buy goods and services online. While this method of buying has its obvious advantages, it often deprives us of the time we used to unconsciously spend assessing the pros and cons of spending our money in a particular way. Impulsive buying has become that much easier as it provides us with the instant gratification that comes with acquiring a new product or service instantly.

Consumer credit has become so common that the cost of financing what we buy is often a matter of filling in a few forms online. The risk that comes with this liberalised approach to borrowing is that some people no longer think about the long-term effects of their financial decisions.

One controversial decision that is likely to affect the future of many UK prospective pensioners is the one that will allow all retirement savers in defined contribution schemes to take their savings as a cash lump sum from the age of 55, rather than draw down their lifelong savings gradually. Steve Webb, the UK pensions minister, encapsulated the mindset of many for instant gratification when he said: “It is up to an individual, not a matter for the government, whether they use their pension pot to buy a Lamborghini sportscar”.

However, human nature being what it is, those who decide to buy a flashy sportscar with their life savings may well be knocking on a future government’s door to rescue them from abject poverty as they realise that their sportscar cannot pay their heating or food bills.

The culture of savings even in our society is becoming increasingly unpopular.

The carpe diem philosophy is embraced not just by the younger generation who were born in a society that made consumerism its hallmark, but also by older generations who increasingly spend money on activities they cannot really afford and that deprive them of the ability to save for a rainy day.

Mischel has some useful advice for handling the risks brought by the urge of instant gratification: “The secret is to find ways of making self-control less effortful”. He promotes what he calls a ‘pre-living approach’ – imagine the outcome of squandering your money as opposed to preserving it in a retirement pot.

A responsible government should promote the ‘pre-living approach’ rather than encourage ‘instant gratification’.

johncassarwhite@yahoo.com