Hot and bothered – Looking too often at portfolio performance can be counterproductive


Ian Kelly

Ian Kelly

Fund Manager, Equity Value

It was only a matter of time before somebody made the connection between the marshmallow test and retirement planning. After all, when you think about it, the test is all about delaying instant gratification in the pursuit of some future benefit – and of course that is what anyone who pays into a pension is effectively doing.

As we noted in Sweet success, the marshmallow test was an experiment developed in the US in the 1960s by Professor Walter Mischel. In short, toddlers were told they could have one sweet immediately or two if they waited 15 minutes. In the decades since, Mischel has gone on to demonstrate a noticeable correlation between his subjects’ ability to delay gratification and success in later life.

In an interview with the Financial Times towards the end of last year in connection with his latest book called – what else? – Marshmallow Test, Mischel explained our ability to delay gratification is linked to what are known as the ‘hot’ and ‘cold’ systems of the brain. The former urges us to scoff the marshmallow while the latter helps us to work through why there could be benefits in holding fire.

“The hot system is great when you’re starving in the wild and looking for food,” Mischel told the FT. “It’s not good when you’re doing retirement planning.” Interestingly, it appears some wealth managers have begun to take note of what the marshmallow test and similar psychological studies might indicate about the decision-making abilities and, as the article puts it, “investment proclivities” of their clients.

But what really caught our eye was a line from the journalist after he had taken an abbreviated version of one of these wealth managers’ behavioural tests to measure his risk tolerance and composure. Though “not overly concerned” with short-term fluctuations in his wealth, he learned he may end up taking on less risk than he felt comfortable with “because you watch your portfolio too closely”.

The idea that looking too regularly at portfolio performance can be counterproductive and actually prevent investors from taking on an appropriate level of risk – and thus from achieving the returns they might otherwise have seen over the longer run – is very much in keeping with the views outlined by The Value Perspective in articles such as Alternative reality and Active service.

Happily for anyone who may have misgivings about their levels of self-restraint, the FT article says Mischel’s research suggests “individuals are quite capable of changing their ability to exert self-control, by using techniques that help to douse the insistent, immediate demands of the ‘hot’ system”. The trick, apparently, is to imagine how the outcomes of instant and delayed gratification might differ or, as Mischel puts it, “to find ways of making self-control less effortful”.


Ian Kelly

Ian Kelly

Fund Manager, Equity Value

I joined Schroders European equity research team in 2007 as an analyst specialising in automobiles. After two years I added the insurance sector to my coverage. In early 2010 I moved into a fund management role, and then took over management of two offshore funds investing in European and Global companies seeking to offer income and capital growth. 

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