There is a famous Greek proverb that goes something like this. ‘Society grows when men plant trees that they know they will never sit under’. That powerful idea is promoting the benefits of delayed gratification, also known as low time preference. Bitcoin is often described as rewarding those who demonstrate that quality, so learning what time preference is….well is certainly worth your time.
In 1972, Walter Mischel, a psychologist at Stanford University in California, conducted one of the most famous experiments in social science, involving nursery aged children and marshmallows.
Each child was placed in a room with no distractions and given the choice of a marshmallow immediately, or double if they were prepared to wait an unspecified amount of time. The researcher would return after 15 minutes and see whether the child had resisted temptation.
The study became famous when, over time, the ability to delay gratification showed positive correlation to SAT scores.
As has happened with many ground-breaking experiments from the 60s and 70s, when revisited with a little more rigour, the results of the Marshmallow Experiment test are less impressive but the underlying message remains; delayed gratification is an important life skill.
So what have children and marshmallows, and old dudes planting trees got to do with Bitcoin? Well quite a lot, as it happens.
Bitcoin is a new monetary system. It is designed to be predictable and digitally scarce. These attributes have made it an effective store of value - like a digital gold - with the characteristic of sound money.
Saifedean Ammous puts his finger on the connection between time preference and sound money in his excellent book ‘The Bitcoin Standard’, which the Learn Crypto blog has reviewed:
[Sound money] protects value across time, which gives people a bigger incentive to think of their future, and lowers their time preference.
Time preference is inextricably linked to the advancement of civilisation. Our ancestors evolved as they gradually invested their time in things that didn’t provide immediate gratification.
This started with making weapons and tools, and then enabled humans to stop being nomadic and applying their energy to one of the most obvious demonstrations of lowered time preference - farming. Plant a seed in the spring to generate food to survive the winter.
The introduction of money was to enable the exchange of surpluses that emerged as time preference lengthened, preserving the energy that had been invested in creating them and ultimately helping civilisation expand.
Money is just a way of storing your energy. So as an attempt to provide the ultimate sound money, Bitcoin can protect the value of your precious labour into the future. When considered in this way, Bitcoin’s biggest meme - hodling - might start making a bit more sense.
Hodling is shorthand for delayed gratification. It's about ignoring the drama of price charts, and setting your time preference years into the future, trusting in Bitcoin’s sound money characteristics and the potential benefits that might bring.
The connection between money and time preference can be powerfully demonstrated when it fails as a store of value, which is what hyperinflation describes.
Hyperinflation is the term given to a currency with rapid and uncontrolled decline in purchasing power. One of the most famous examples is Germany between the two World Wars.
This from another great crypto book, Adam Ferguson’s unrivalled analysis of the subject ‘When money dies’
In October 1923 it was noted that the number of [German] marks to the pound equalled the number of yards to the sun...at the end of the Great War [WW1] one could in theory have bought 500,000,000,000 eggs for the same price as that, for which five years later, only a single egg was procurable
These figures are impossible to comprehend. Such was the weakness of the Mark, that a meal would become more expensive in the short time between ordering it and paying for it.
When purchasing power declines at that pace, the only sensible action is to exchange it for something useful or a superior store of value, as quickly as you can. Which of course, is why Bitcoin trades at a premium in Venezuela, Turkey, Argentina and Nigeria. All countries with weak currencies.
Going back to Mischel’s Marshmallow Experiment, one of the reasons why the tests of his original experiment were questioned were because the children came from similar, privileged backgrounds.
It would be insensitive and condescending to preach the virtues of delayed gratification to someone who simply doesn’t have that luxury, while life would be very boring if once in a while, those who can afford it, didn’t spend money simply for some immediate gratification - an ice cream, a beer, another beer, then a shot…..you get the picture.
So it’s not important to have a low time preference for everything in life, and as you age your time preference will shorten, which is what bucket lists are all about. However, just being aware of what time preference is, and its relation to decisions you make - especially financially - can add a valuable perspective not just to your own life, but trends in society in general.
We are constantly encouraged through advertising to consume today, purchase today, live life in the moment. And though there are merits to that mentality, at scale it reflects a high time preference society, the desire for gratification now, because perhaps we are unsure of the future.
One of the reasons for that is that the dominant form of money is far from sound, but society needs money, and so to evolve, society will find better forms of money, that lower time preference and allow us to think about planting trees for someone else to sit under.