- Optimism, specifically in financial matters, may be the result of low cognitive ability, according to a new paper.
- The study is based on data from over 36,000 people in the U.K.
- The study finds intelligent people do better in money matters because they are realistic rather than optimistic when making plans.
Positive thinking and optimism are often associated with success in life. However, a new study from the University of Bath in the U.K. suggests that they are signifiers of low cognition, since they frequently lead to poor decision-making, specifically in the realm of finance.
The study finds that people with the highest cognitive ability are 22% more likely to be realistic (pessimistic) in financial planning, with a 34.8% reduction in optimism compared to people of low cognitive ability.
The study suggests that optimism bias leads people to anticipate more positive outcomes than they should reasonably expect in business planning, investing, and other fiscal activities. The result is loss of funds, debt, and business failures.
Optimism may be little more than a side effect of low cognitive power, according to the study.
Using data from the nationally representative annual U.K. longitudinal survey Understanding Society, the authors of the study analyzed data from 36,312 individuals. Participants responded on multiple occasions to questions regarding a wide range of topics, including labor market activity, household dynamics, as well as their personality, attitudes, and opinions.
The cognitive ability of respondents was based on measurements of various cognitive skills, including verbal fluency, memory, numerical reasoning, and fluid reasoning.
The study is published in the Personality and Social Psychology Bulletin.
Psychologist Dr. Andrew Cuthbert questioned the primary hypothesis of the study: that optimism is a byproduct of low cognition: “I have some concerns as someone who is trained in research but focuses on practice.”
“I have regularly done cognitive assessments as a part of my practice, and the briefness of the cognitive assessments done in this study gives me some pause in making too sweeping of conclusions related to lower cognitive ability and higher optimism.”
“Forecasting the future with accuracy is difficult, and for this reason alone, errors in forecasting, both optimistic and pessimistic, may be more likely to arise for those low on cognitive ability,” said the study’s lead author Dr. Chris Dawson.
“My results indicate that low cognitive ability leads to an increased probability of just self-flattering biases. Humans are naturally primed to be optimistic,” he added.
“Intelligence governs the ease to which this primed response can be overridden when important financial decisions have to be made,” he said.
Clinical psychologist Aura De Los Santos agreed, “Cognitive skills can play a key role in helping people interpret situations correctly.”
“Optimism causes people to risk taking things lightly, not measuring consequences, and in the end — when things do not go well and as a way of not taking responsibility — they see it as bad luck,” added Los Santos.
While the study pairs optimism and pessimism in its opening paragraph, Dr. Dawson differentiated between the two in an email to Medical News Today: “Realists are those who make accurate assessments of the future, and pessimists are those that overestimate the likelihood of bad things happening.”
He said that both pessimism and optimism may cloud one’s view of likely financial outcomes, with the former being overly negative and the latter being overly positive.
While optimism may not provide a clear view of one’s fiscal prospects in a given situation, it may be that it can still be of value.
Psychologist Dr. Andrew Cuthbert cited a passage in the study, saying “psychological well-being and self-esteem, improvements in our ability to cope with negative feedback, and the ability to savor in our future successes are all immediate benefits of unrealistic optimism.”
He cautioned, however, “The word ‘immediate’ is key. In a difficult moment, being optimistic can keep you moving, whereas excessive pessimism might keep you paralyzed and unable to make the initial steps needed to improve.”
Los Santos linked optimism with hope for a better future and “to be able to see beyond the current situation.”
Dr. Dawson was not so sure, saying, “It is not obvious, at least to me, that optimism is useful for coping with life’s emotional challenges.”
“The famous bias ‘Loss Aversion‘ — the tendency to feel more pain when experiencing losses than pleasure from equal gains — suggests that optimism makes it even harder to cope with negative outcomes. That is, people who expect too much are inevitably disappointed, and this disappointment can be very psychologically painful.”
Still, said Dr. Dawson, “Positive thinking may have some benefits. It is often argued that it provides motivation, can have social benefits and can make people feel good about themselves.”
He emphasized, however, “when it comes to decision-making, especially big decisions regarding investments and careers, having realistic expectations will always deliver better decision-making and therefore better outcomes for individuals.”
When asked if embracing realism in financial matters necessarily results in a more satisfying life, Dr. Dawson was more emphatic: “Yes, I have a paper on why realists are the happiest.”
Dr. Cuthbert and Los Santos wondered if this is necessarily the case.
While a realistic perspective is more likely to lead to a positive fiscal outcome, Los Santos said, at the same time, optimism may render the decision-making process calmer, if only in the short term.
Dr. Cuthbert’s answer was, “It depends.” He said it is inarguable that “flexibility due to finances would increase life satisfaction.”
“On the other hand,” he said, “perfectionism leads to lower life satisfaction. Therefore, if excessive perfectionism is excessively applied to financial decisions, with constant worry about not making financial mistakes, I would anticipate it would lead to lower life satisfaction.”