Would you rather pay $79.00 or $95.88 for the same service? Amazon just figured out how to get the $95.88 from some people.
People who sign up for Amazon Prime get “free” (but we know there is no such thing as “free”) 2 day shipping, access to kindle e-book lending and video streaming. The choice though is $7.99 a month or $79.00 for the entire year.
Making a decision about Amazon prime involves our ability to delay gratification. For many people, the current pleasure of a $7.99 bargain far outweighs the current pain of $79 even if we enjoy the benefit in 12 months by having 20% more in our pocket.
Scientists who study delayed gratification usually cite Walter Mischel’s marshmallow experiment. The experiment was all about self-control. Sitting at a table with a marshmallow or a cookie, a 4-year old was told he or she could have one cookie now or two by waiting a bit. After testing hundreds children, Mischel observed that some could last 20 minutes, others capitulated immediately, and the average resistance time was 7 or 8 minutes. The video below shows a wonderful example of a marshmallow experiment.
Decades later in a follow-up study, Mischel discovered that the SAT scores of children who held out for 15 or 20 minutes were 210 points higher than those who lasted only 30 seconds. The “high delayers” also had better jobs, were thinner, and more likely not to take drugs. Contemporary researchers are now discovering that parenting and genetics both can impact our self-control.
The ability to delay gratification, however, takes us far beyond Amazon Prime and marshmallows. At home, it relates to the housing crisis when many of us selected mortgages that were cheaper in the short run but then ballooned into massive unaffordable obligations. For business, it takes us to current incentives that lead CEOs to avoid long-term hugely beneficial investments because a short run project will get a fast return. And with government, we can cite excessive borrowing that reflects again an inability to delay gratification until it is affordable.
Sources and Resources: Thanks to my web designer Julian Foster who recommended the Wiredarticle that presents lots more detail about the Amazon prime offer. I also suggest looking at Nobel laureate Daniel Kahneman’s Thinking Fast and Slow for further discussion of self-control and gratification.
Reading about why people have a tough time delaying gratification, I started to think about countries.
A part of your brain–the insula–becomes more active when faced with an unpleasant task like dieting or seeing your team lose. Two MIT professors discovered that you can add paying with cash to the “unpleasant list” but not credit cards. As one of them said, “The nature of credit cards ensures that your brain is anesthetized against the pain of payment.” The result? You buy a lot more when you postpone payment (and pain) by charging it.
Countries also have been postponing payment and pain. Greek and Spanish pension obligations will soar during the next 40 years. Currently averaging between 20-30 percent of GDP for most euro zone countries, entitlement spending on public pensions, health care, and unemployment insurance is rising. Like cash vs. credit, aren’t overextended entitlement programs examples of current pleasure that will generate considerable future pain?
The Bottom Line: Will it ever be politically viable to realign incentives so that current gratification can be delayed in favor of future economic growth?
My facts about the insula and our shopping decisions, and my quotes, came from Jonah Lehrer in Wired and his book, How We Decide (p. 86). For the graphs and analysis of overextended entitlements, I consulted this NBER working paper. You might also want to look at economist Allan Meltzer’s new book, Why Capitalism.
Observing young children, scientists believe they can predict certain adult outcomes. One classic study from the 1960s involved delayed gratification. A child and a single marshmallow were left in a room. The child could have one marshmallow now or two later. When interviewed 40 years later, those who resisted temptation as children had better jobs as adults. In New Zealand, a group observed 1037 children from birth to 32. Those with more self-control were more affluent. Also, they were healthier.
The Economic Lesson
If one segment of the population generates excess costs to society in health care, financial dependency and crime, then should schools provide early childhood self-control programs? The New Zealand team says yes if the cost/benefit ratio is good (p. 5).
An Economic Question: Which variables might you identify if asked to compare the cost and benefit of early childhood programs that develop self-control?