Optimistic thinking is often hailed in self-help literature as the path to happiness, health, and longevity, but it can also lead to poor decision-making. This optimism is especially critical when it comes to financial health, where it can have serious consequences. Research from the University of Bath shows that excessive optimism is actually linked to lower cognitive abilities such as verbal fluency, fluid reasoning, numerical reasoning and memory. People with strong cognitive abilities tend to have more realistic and pessimistic expectations about the future.
"It's very difficult to accurately predict the future, so we might expect people with low cognitive ability to make more errors in their judgments, whether pessimistic or optimistic. But the results are clear: low cognitive ability leads to more self-glorification biases - people are basically fooling themselves to some extent," said Dr Chris Dawson of the university's School of Management.
Dr Dawson added: "This suggests that while humans may have evolved to expect the best, those with greater cognitive abilities are better able to override this automatic response when making important decisions. Planning based on overly optimistic beliefs will lead to poor decisions, with outcomes that are bound to be worse than realistic beliefs."
Decisions about major financial issues such as employment, investments or savings, as well as any choices involving risk and uncertainty, are particularly susceptible to this influence and can have serious consequences for individuals.
"Unrealistically optimistic financial expectations can lead to overspending and debt, as well as undersaving. It can also lead to too many entrepreneurship and subsequent failure. The odds of entrepreneurial success are slim, but optimists always think they have a chance and will start businesses that are destined to fail," Dr. Dawson said.
The study, which used data from a UK survey of more than 36,000 households, looked at people's expectations of their finances and compared them with actual financial outcomes. The study found that people with the highest cognitive abilities were 22% more likely to be "realistic" and 35% less likely to be "extremely optimistic".
"We are programmed to think positively, and the problem is that this can adversely affect the quality of our decision-making, especially when we have to make serious decisions. We need to be able to overcome this, and this study shows that people with strong cognitive abilities are better able to deal with this than people with poor cognitive abilities," he said.
"Unrealistic optimism is one of the most common human traits, and research shows that people consistently underestimate the negative and emphasize the positive. The concept of 'positive thinking' is almost certainly ingrained in our culture - and it's healthy to revisit this belief."
Compiled source: ScitechDaily