Excessive Optimism in Finance Linked to Lower Cognitive Ability: Study.

Excessive Optimism in Finance Linked to Lower Cognitive Ability

Optimism, particularly in financial matters, might be indicative of low cognitive ability, according to a recent paper from the University of Bath in the U.K (Source: Medical News Today). The study, based on data from over 36,000 people in the U.K., challenges the commonly held belief that positive thinking and optimism lead to success. Instead, the research proposes that these traits could be associated with poor decision-making, especially in financial planning.

The study reveals that individuals with higher cognitive ability are 22% more likely to adopt a realistic (pessimistic) approach in financial planning, showing a 34.8% reduction in optimism compared to those with lower cognitive ability. The researchers argue that optimism bias can lead individuals to expect more positive outcomes than realistically anticipated in areas such as business planning and investing, resulting in financial loss, debt, and business failures.

Drawing on data from the Understanding Society U.K. longitudinal survey, which included responses from 36,312 participants on various topics, the study assessed cognitive abilities through measurements of skills like verbal fluency, memory, numerical reasoning, and fluid reasoning.

While the study suggests that optimism maybe a side effect of low cognitive power, some experts express reservations. Psychologist Dr. Andrew Cuthbert questions the study’s hypothesis, emphasizing the briefness of cognitive assessments. Lead author Dr. Chris Dawson acknowledges the challenge of accurately forecasting the future and notes that errors in forecasting, both optimistic and pessimistic, may be more likely for those with lower cognitive ability.

Experts also add that cognitive skills play a crucial role in interpreting situations correctly. She points out that optimism can lead to risk-taking without considering consequences, and individuals may attribute failures to bad luck rather than taking responsibility.

The study, published in the Personality and Social Psychology Bulletin, contributes to the ongoing dialogue about the intersection of cognitive abilities, decision-making, and optimism, challenging traditional notions about the relationship between positive thinking and success, particularly in financial domains.

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