Positive thinking and optimism are frequently related to life success. A new study, however, reveals that they are indicators of inferior cognition, as they frequently lead to bad decision-making, particularly in the field of finance.
According to the study, those with the highest cognitive capacity are 22% more likely to be realistic (pessimistic) in financial planning, with a 34.8% decrease in optimism.
According to the study, optimism bias causes people to expect better outcomes than they should in business planning, investing, and other financial activities. As a result, funds are lost, debt is incurred, and businesses fail.
Overconfidence and poor cognition:
The study’s fundamental hypothesis is that optimism is a result of poor cognition: “I have some concerns as someone who is trained in research but focuses on practice.”
The briefness of the cognitive measures used in this study makes it difficult to draw broad inferences about lower cognitive capacity and more optimism.”
Forecasting the future with accuracy is difficult, and for this reason alone, forecasting errors, both optimistic and pessimistic, may be more likely to occur in those with low cognitive ability.
Pessimism vs realism:
While the study’s introductory paragraph couples optimism with pessimism, realists are those who make accurate evaluations of the future, whereas pessimists overestimate the likelihood of negative things happening.
Pessimism and optimism can both impair one’s perception of future financial results, with the former being unduly pessimistic and the latter being overly enthusiastic.
Is there a link between realism and increased life satisfaction?
While a realistic outlook is more likely to result in a beneficial fiscal outcome, optimism may soothe the decision-making process, if only temporarily.
It varies; however, it is unarguable that “financial flexibility would increase life satisfaction.”
“Perfectionism, on the other hand, leads to lower life satisfaction.” As a result, if extreme perfectionism is applied to financial decisions with constant stress about not making financial mistakes, I anticipate decreased life happiness.”
What Exactly Is the Optimism Bias?
Your brain has an inherent optimistic bias. The phenomenon has also been referred to as “the illusion of invulnerability,” “unrealistic optimism,” and a “personal fable.”
This bias enables us to feel that we are less likely to be unlucky and more likely to succeed than reality suggests. 2 We believe we will live longer than the average, have smarter children than the average, and be more successful in life than the average. However, we cannot all be above average.
In 1980, a psychologist called Neil Weinstein described the optimism bias for the first time. Weinstein discovered that most college students believed they had a reduced likelihood of having an alcohol use disorder or getting divorced compared to their peers. 3 Most students also believed that their odds of achieving excellent life outcomes, such as owning their own home and living into old age, were significantly higher than their peers.
Factors That Contribute:
The following are some of the elements that increase the likelihood of optimism bias:
Infrequent events are more susceptible to the optimism bias than frequent ones. 10 People may believe they are unlikely to be affected by storms and floods because these events do not occur on a daily basis.
Control: When we believe we have direct control and influence over events, we are more likely to be optimistic. 10 People don’t believe things will magically work out, as Sharot explained in her TED Talk; they believe they have the abilities and know-how to make it happen.
Probability: If the unfavorable event is viewed as unlikely, the optimism bias is more likely to occur.
“Unrealistic optimism is one of the most prevalent human traits, and research has shown that people consistently underestimate the negative while exaggerating the positive.” “The concept of ‘positive thinking’ is almost unquestionably embedded in our culture, and it would be beneficial to reconsider that belief.”