Education and Affluence

Kennon-Green & Co. Fiduciary Financial Advisor, Wealth Management, Global Value Investing

Whether or not a person is capable of waiting for rewards, and thus succeeding in things that require long-term planning such as investing, money management, completing higher education, and sticking with difficult projects for the promise of richer payouts, may not be due to willpower alone.  In a new study, researchers Celeste Kidd, Holly Palmeri, and Richard N. Alin find that a child’s ability to delay gratification depends upon his or her internal assessment of the reliability of the adults, and world, and around them.  

[mainbodyad]The results, which are not surprising according to ScienceNews, have wide-ranging implications for societal structure and the causes of poverty.  This may explain why someone who grew up poor has a hard time amassing assets in a 401(k) plan or building a rainy day fund, a problem that has consistently reared itself in that employees who grew up in middle class or higher backgrounds are more likely to take advantage of benefits, such as retirement matching, than their equally compensated coworkers who grew up poor.  (The best solution economists have found to this behavior is to setup automatic opt-in defaults because people are likely to stay with the status quo.)

The adults who came from a poverty background aren’t just being stupid.  They are acting out on a script they learned in youth.  When the people around you constantly let you down, or you don’t know where the next dollar is originating, the best course of action seems to be to live for today and enjoy what you have while you have it because you never know when it will be taken.  This gets imprinted on your subconscious, something advertisers have known for decades.  (For example, Procter & Gamble knows that if your mother used Tide, the odds are good that you use Tide as well.  People repeat the behavior they see in their parents more often than not.  The result is billions of dollars spent getting young moms to use Dawn dish soap or Gain dryer sheets.)  In contrast, those who grew up in stable, two-parent households with reliable adult figures are much better at delaying gratification now for more lucrative payoffs in the future.

For Most People, Poverty and Affluence Are Learned Behaviors

This supports something I’ve always said: The children of the successful enjoy success on their own not so much because of support received from the parents, but because they are taught, either directly or through cultural osmosis, the “rules” of how to succeed in our current market system.  When you grow up seeing how money works, you are going to have a better chance at making money, even if you don’t enjoy an inheritance.

This should be perfectly obvious to anyone who looks at the sickening statistics on poor people who suddenly become very rich.  Consider that 78 out of every 100 professional NFL players are bankrupt within three years of retirement despite earning tens of millions, or in some cases, hundreds of millions of dollars.  In the NBA, the figure is 60 out of 100 go completely broke within five years of retirement.  Winning the lottery if you are poor doubles your chances of bankruptcy

Education and Affluence

A new study shows that children develop the ability to practice delayed gratification – which has enormous implications for net worth and professional accomplishment – based not solely on willpower, but on the stability and reliability of the adults in their life. This leads to the interesting conclusion that the biggest advantage the rich give their kids, as a group, is not so much financial in terms of money solely for the sake of money, but rather stability, comfort, security, and education. Those things combine to forge a skill set that makes success much easier in life.  If you come from a stable home where good choices paid off, you are more likely to put in the effort to finish college, save for retirement, or start a business.

This makes sense.  Imagine a child has a piggy bank, and his or her parent is a drunk or irresponsible.  The kid saves money, but mom or dad breaks in and takes it whenever cash is short.  How long do you think the kid will continue to save?  At some point, any intelligent person is going to realize the best course of action is to redeem what you have, when you can.  The problem comes when that kid grows up, leaves home, and repeats this mental script, behaving in a way that is ultimately self-defeating.

This lends demonstrable credence to one of the premises of educator Ruby Payne’s theory that poverty is caused by an entirely different worldview, and that the people who grow up in poverty are acting rationally based upon their own life experiences.  Most are not bad people.  Most are not stupid.  Most are simply behaving in a way that worked for the circumstances in which they found themselves.  It turns out, humans are remarkably adept at adjusting to the circumstances into which they are born, like Darwin’s finches.

This goes hand in hand with our study of mental models.  The concept behind mental models is that certain ideas are like tools.  The more tools you have in your toolbox, the better equipped you are to find solutions to complex problems and achieve what you desire.  If you grew up with a single working class parent and never had exposure to, say, a bank trust department, you probably don’t know how they function.  On the other hand, if you grew up in an affluent family – think both Hayley Mills characters in the original Walt Disney Parent Trap film – and you someday find yourself with a pile of cash and need to leave it to a child or grandchild, you know whom to call, what is standard, and how to structure the deal effectively.  We pick up far more than we realize from our surroundings.  It doesn’t occur to most people, for reasons I will never understand, to actively seek out new knowledge and apply it to their own life.  The Internet might be changing that for the better.  I hope that is true.  (When I was younger, you had to go to a public library if you wanted to learn about how convertible bonds worked.  Today, you can do a quick search.)

None of that is to say that financial capital and social capital, in the form of network contacts, isn’t important.  It is.  It certainly is.  Having them is most definitely an advantage, just as some people are born with beautiful looks, some people are born with athletic skill, and some people are born with a penchant for learning foreign languages.  Talent, ease of acquisition of new skills, and luck are not distributed fairly.  It’s the nature of the universe in which we live.  Rather, it is to say that much of the difference in net worth and income inequality between the rich and the poor when you look at the largely self-made crowd has to do with learned behavior.  

Stated more bluntly: For those who do not suffer from genetic shortcomings (extremely limited intelligence) or health problems that result in catastrophic medical bills, poverty is often the result of sub-optimal behavior, which results from subconscious scripts learned during childhood.  Those scripts are influenced by the type of adults in your life when you were younger.

The best thing you can do if you are poor is provide a stable home for your kids and instill in them a lifelong passion for education.  If you can teach somehow how to think, most everything else can be overcome.  Accumulating money is like playing the piano or riding a bike.  It can be learned.

We Need More Early Childhood Education

For me, the only rational way I see to fix the problem is to increase equality of opportunity by supporting early childhood education for the young men and women who are born into poverty (as well as those born into other unfortunate circumstances such as to drug addicts or criminals).  By the time a kid gets to junior high or high school, it is almost too late.  Early childhood education is the answer.  It is the key.  It is the secret. 

The United States needs to implement a system that gives kids born into poverty the same benefit as those who are born into affluence.  Every third grader in the country should be able to explain what an underwriter is and how it works.  They should know what dividends are.  They should know how basic banking products are priced.  They should understand different structures such as limited partnerships or corporations.  Every poor kid in the country should study Rose Blumkin or Steve Jobs.

Not to be immodest, but I guarantee I could write a lesson plan that was age appropriate in under ten minutes and explain all of this to that age group.  In a single afternoon, I can teach anyone who can do arithmetic, subtraction, multiplication, and division all of the basics of stocks, bonds, real estate, and compounding.  This knowledge should not be a treasure guarded by the well-heeled.  It should be given to every child.  It should be as widely taught as geometry because it has more practical use for most students.  Maybe then, we can tackle the Belmont vs. Fishtown problem that threatens upward mobility and, in extension, the United States as we know it.