How Impatience Kills Your Credit Score

Everything seems to come back to marshmallows in the end. You may recall the famous 1972 Stanford psychology study, conducted by Walter Mischel, in which a group of kids were presented with a plate of marshmallows and told that if they could wait and not eat them now, they’d get a better reward later. When the adults left the room, some of the kids stuffed marshmallows into their mouths with abandon, while others fought back the urge and waited it out. (Great article here about this and related studies.)

In the current economic crisis, a lot of economists have wondered if what we have going on is the marshmallow experiment writ large.  A study in the journal Psychological Science tests the hypothesis and the results suggest that, indeed, we’re living in a confectionary crisis of Stay Puft proportions.

Two economists from the Federal Reserve’s Center for Behavioral Economics and Decision-Making in Boston recruited 437 low-to-moderate income people at a community center that was offering tax preparation help.  Each person was given a questionnaire in which they made choices between a smaller, immediate reward and a larger future reward (a common test for finding out if people are willing to delay gratification).  

The time spans for how long they’d have to delay gratification were varied, which layered in an additional test for patience (in other words, you might be willing to delay gratification for a day, but three days pushes you over the limit).  The participants also agreed to let the researchers access their credit scores.

The result: The most impatient among the group of volunteers had the lowest credit scores. This result held true even when confounding factors like income levels were accounted for.

It is, of course, unfair to conclude from these results that everyone with a low credit score who participated in this study brought financial disaster upon themselves. Some had lost their jobs, and the subsequent cascade of debt defaults was not something they chose. 

But the correlation is strong enough to suggest a general connection between faulty short-term desire management and bad financial outcomes.  And with the credit and mortgage industries serving up an endless supply of short-term marshmallows, it’s not hard to see how we got here. 

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Posted on June 8, 2012 .