Plans built on overly optimistic assumptions lead to bad choices and will inevitably produce worse results than those based on realistic assumptions.
Self-help literature have long promoted optimistic thinking as the path to happiness, health, and longevity; nevertheless, it can also result in poor decisions that have a negative impact on people’s financial security. The concept of ‘positive thinking’ is almost ingrained in us, and it would be beneficial to revisit that belief, as per new research.
Excessive optimism is actually linked to worse cognitive abilities, including verbal fluency, fluid reasoning, numerical reasoning, and memory, according to research from the University of Bath.
On the other hand, those with high cognitive capacity typically have more realistic and negative views for the future.
In depth
Accurately predicting the future is challenging, so we shouldn’t be surprised if people with inferior cognitive capacity make more mistakes in their judgments—both optimistic and pessimistic. However, Dr. Chris Dawson of the University’s School of Management remarked that the findings are unmistakable: persons who have low cognitive capacity tend to be more self-flattering in their prejudices, thereby partially deluding themselves.
This suggests that although humans are predisposed to assume the best due to evolution, people with strong cognitive capacity are better able to counteract this natural response when making crucial judgements. Plans built on overly optimistic assumptions lead to bad choices and will inevitably produce worse results than those based on realistic assumptions.
Major financial decisions, such those on work, savings, or investments, as well as any decision involving risk and uncertainty, were especially vulnerable to this effect and had significant ramifications for people.
Financial expectations that are overly optimistic might result in excessive debt and expenditure, as well as inadequate savings. Excessive business entry and eventual failures may also result from it. Although the likelihood of launching a profitable business is quite low, hopeful people will always believe they have a chance and will launch ventures that are doomed to fail.
The study, “Looking on the (B)right Side of Life: Cognitive Ability and Miscalibrated Financial Expectations,” examined people’s expectations of their financial welfare and contrasted them with their actual financial outcomes using data from a UK survey of more than 36,000 families.
Take away
According to the study, people with the highest cognitive capacity were more likely to be described as “realistic” (22% higher) and less likely to be described as “extremely optimistic” (35% lower).
Positive thinking is ingrained in us, yet it can have a negative impact on the quality of decisions we make, especially when faced with important choices. People with strong cognitive ability manage this better than those with low cognitive ability, and we need to be able to override it, according to this research.
One of the most common human tendencies is unrealistic optimism, as evidenced by studies that reveal people constantly overestimate the positive and underestimate the negative. Our culture is nearly completely ingrained with the idea of “positive thinking,” thus it would be beneficial to review that notion.
