Optimistic Mindset Linked to Poor Decision-Making

While the power of positive thinking may boost confidence, it may not be the best path to successful financial decisions.

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Although a positive mindset is often associated with success, a new study suggests that excessive optimism often leads to poor decision-making, especially when it comes to finances.

The study, conducted by the University of Bath in the United Kingdom and published in the Personality and Social Psychology Bulletin, sought to determine whether people with an optimistic mindset had worse decision-making cognition than people who were more realistic. The researchers found that people with lower cognitive function tended to be more optimistic, which led them to make poor financial decisions.

Study Findings Explained

The study examined more than 36,000 individuals and found that people with realistic expectations and planning processes tend to make wiser decisions than people with a more optimistic mindset.

Researchers discovered that people with the highest cognitive ability were 22 percent more likely to be realists (or pessimists) when it came to financial planning. They also had a 34.8 percent decrease in optimistic tendencies compared with people with lower cognitive ability. Cognitive ability was measured based on various cognitive skills, including verbal fluency, numerical reasoning, and memory. The results suggest that optimism bias causes people to expect unrealistically positive outcomes in life decisions, especially regarding their finances.

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“Optimism bias can lead to people not thinking about the consequences of their financial decisions when they think that everything will have a positive outcome or the outcome they expect,” Aura De Los Santos, a clinical psychologist, told The Epoch Times in an email. “High cognitive ability is associated with a higher level of realism because people understand that making deliberate decisions and thinking that there will be only one outcome is not very likely.”

What Is Optimism Bias?

Optimism bias causes people to believe they are less likely to experience negative events than they actually are. About 80 percent of people have an optimism bias—so it appears to be an integral part of human nature.

Optimism bias can have both positive and negative effects. First, optimism may be beneficial for physical health as one study reported that optimists are 14 percent less likely to die before age 65 and 30 percent less likely to die from cardiac arrest. Optimism also reduces stress and anxiety, which can have positive long-term effects on one’s health.

“Positivism is also a reflection of having a healthy or positive outlook that can lift the mood when people are going through difficult situations, where they are able to see the other side of the coin,” Ms. De Los Santos said.

On the other hand, excessive optimism can lead people to make decisions that may cause harm in the future, including risky financial decisions, unprotected sex, substance use, etc. The consequences can come at a significant personal cost.

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“People with an optimism bias may be very confident in their abilities, specifically in the financial decisions they make, not recognizing that they may have weaknesses in not knowing the moves they are making,” Ms. De Los Santos said. “Overconfidence is beneficial for self-esteem, but it can also lead to failure.”

How Does Excessive Optimism Lead to Low Cognition?

Optimism innately causes people to take risks without properly considering the consequences. Excessive optimists may also believe that everything will turn out well in the end, even though they do not do what is required to achieve that outcome.

People with a more realistic or pessimistic mindset tend to make wiser decisions and display better judgment than optimists, suggesting that low cognitive ability is an underlying cause of an excessively optimistic mindset.

“An overly positive mindset can negatively affect human beings because they may not be prepared to deal with outcomes different from what they expect. Their capacity to adapt would be lower because they have not contemplated other scenarios,” Ms. De Los Santos said. “Low cognitive ability can be related to the inability of people to realize that they are not making good decisions. It is likely that there is a close relationship between extreme positivity and incompetence.”

Is Realism the Best Way to Go?

Focusing on realistic thinking means you are prioritizing reality and therefore the most realistic outcomes. Some research suggests that people with more realistic expectations (neither excessively positive nor excessively negative) tend to have better overall well-being. In general, decisions that are based on inaccurate, overly dramatic beliefs are far more likely to deliver worse outcomes than rational expectations are.

“In my experience as a psychologist, I have seen how high cognition is related to the ability to think through different scenarios, to consider financial gains and losses, where the human being understands their capabilities and how far they go,” Ms. De Los Santos said. “An overestimation of their abilities can be a way to reinforce their self-esteem, but at the same time it can harm the financial aspect because decisions are made without taking into account the impact they can have.”