Optimism is often celebrated as a virtue that leads to happiness and success. However, a study from the University of Bath suggests that excessive optimism, particularly in financial matters, might not always be beneficial.
The research, published in Personality and Social Psychology Bulletin, reveals a link between excessive optimism and lower cognitive skills like verbal fluency, fluid reasoning, numerical reasoning, and memory.
In contrast, individuals with higher cognitive abilities tend to have more realistic, sometimes even pessimistic, expectations about the future.
Dr. Chris Dawson from the University of Bath’s School of Management explains, “While humans might be naturally inclined to expect the best, those with higher cognitive abilities are better at overriding this instinct in decision-making.”
Financial Decision-Making Risks
The study highlights the potential dangers of unrealistic optimism in financial decision-making.
Overly optimistic financial expectations can lead to imprudent behaviors like excessive spending, debt accumulation, inadequate savings, and risky business ventures.
“Optimists often believe they will succeed against the odds, leading to decisions like starting businesses that are more likely to fail,” says Dr. Dawson.
The research used data from a UK survey of over 36,000 households, comparing people’s financial expectations with actual outcomes.
It found that those with higher cognitive abilities had a 22% higher chance of being realistic and a 35% lower chance of being extremely optimistic.
The Need for Realistic Thinking
This tendency for unrealistic optimism is widespread and can lead to poor decision-making, especially in serious matters.
Dr. Dawson points out, “Our natural positive thinking can impact the quality of our decisions. It’s crucial for people, particularly those with lower cognitive abilities, to strive for more realistic thinking.”
Rethinking ‘Positive Thinking’
The study urges a reevaluation of the widely accepted notion of ‘positive thinking.’ Dr. Dawson notes, “Our culture almost unquestionably embraces positive thinking.
However, this research indicates the importance of a more balanced approach to optimism, especially when it comes to crucial decisions.”
The University of Bath’s study offers a new perspective on optimism, challenging the conventional wisdom that being overly optimistic is always good. In financial contexts, this trait can lead to risky choices and poor outcomes.
Therefore, fostering a more realistic outlook, especially among individuals with lower cognitive skills, is essential for making sound financial decisions.
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The research findings can be found in Personality and Social Psychology Bulletin.
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