BATH, United Kingdom — Being too optimistic may lead to poor decisions, a surprising new study reveals. Researchers from the University of Bath found that, when it comes to your financial well-being, it actually helps to look at the glass as half-empty instead of focusing on the positives in life.
It’s a stunning turn, seeming how there are a plethora of self-help books available which preach about the power of positive thinking. Prior studies have examined the link between optimism and good health, long life, and overall happiness. However, this new study found that people who displayed excessive levels of optimism also displayed poorer cognitive skills. These included drops in verbal fluency, fluid reasoning, numerical reasoning, and memory.
On the other hand, those who displayed a more realistic and pessimistic personality made wiser financial decisions.
“Forecasting the future with accuracy is difficult and for that reason we might expect those with low cognitive ability to make more errors in judgments, both pessimistic and optimistic. But the results are clear: low cognitive ability leads to more self-flattering biases – people essentially deluding themselves to a degree,” says Dr. Chris Dawson of Bath’s School of Management, in a university release.
“This points to the idea that whilst humans may be primed by evolution to expect the best, those high on cognitive ability are more able to override this automatic response when it comes to important decisions. Plans based on overly optimistic beliefs make for poor decisions and are bound to deliver worse outcomes than would realistic beliefs.”
Specifically, researchers discovered that being too optimistic impacted decisions tied to employment, investments or savings, and any choice involving risk and uncertainty.
“Unrealistically optimistic financial expectations can lead to excessive levels of consumption and debt, as well as insufficient savings. It can also lead to excessive business entries and subsequent failures. The chances of starting a successful business are tiny, but optimists always think they have a shot and will start businesses destined to fail,” Dr. Dawson continues.
During this experiment, study authors surveyed over 36,000 households in the United Kingdom, examining their expectations for their financial well-being. They then compared those expectations to each person’s actual financial situation.
Those with the highest scores for cognitive ability displayed a 22-percent increase in expressing “realism” and a staggering 35-percent drop in the chances of expressing “extreme optimism.”
“The problem with our being programmed to think positively is that it can adversely affect our quality of decision making, particularly when we have to make serious decisions. We need to be able to over-ride that and this research shows that people with high cognitive ability manage this better than those with low cognitive ability,” Dr. Dawson concludes.
“Unrealistic optimism is one of the most pervasive human traits and research has shown people consistently underestimate the negative and accentuate the positive. The concept of ‘positive thinking’ is almost unquestioningly embedded in our culture – and it would be healthy to revisit that belief.”
The findings are published in the Personality and Social Psychology Bulletin.
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Duh
Makes ALOT of sense! Save as much as possible for retmt. Use your excel skills (not difficult to learn), and do the future acct balance, without making optimistic assumptions such as I’ll work til 65, I’ll earn 7% inv egns — no! You may lose your job early, invst return may be 5.5% Longterm, etc. And spread ur assets around & NOT with too much % stocks. Most ppl just don’t plan ahead well, don’t save enuf, go to experts who don’t always know!
I think I can attest to this. I freely gave our money to kids education and some other kids’ education overseas and was over-optimistic we’d be okay, but I didn’t account for early retirement due to brain trauma. I was the optimist and mostly sat in the driver’s seat. We’re okay, but this article describes me except I did have some success in business. My husband is the realist. I thought positive thinking was the way to go. Insightful article.